
0iiW • u.-.'4p4 " 



WPXRiam DEPOSIT. 



INTRODUCTION 



TO 



ECONOMICS 



BY 

HENRY ROGERS SEAGER 

'Professor ofTolitioal Economy in Columbia University 



THIRD EDITION, REVISED AND ENLARGED 




NEW YORK 

HENRY HOLT AND COMPANY 
1905 



LIBRARY of CONGRESS 
Two Copies Received 

DEC 11 1905 

Copyricht Entry 

CLASS A XXc. No, 

COPY B. 



Copyright, 1904, 1905 

BY 

HENRY HOLT AND COMPANY 



THE MERSHON COMPANY PRBSS 
RAHWAY. N. 3.. 



PREFACE TO THE FIRST EDITION 

The presentation of economics to college classes is a task 
of no little difficulty. If lectures are depended upon exclusively, 
much time must be wasted in imparting information that could 
be acquired more quickly and more surely from the printed 
page. On the other hand^ exclusive reliance on a text-book 
results in narrowness and dogmatism on the part of both 
teacher and student. A combination of the lecture and text- 
book methods offers a means of escape from these difficulties, 
but to make this satisfactory, a text-book especially designed for 
the purpose must be used. Such a book should contain r.;: 
only the information needed, but a systematic exposition of 
economic principles, intended to introduce rather than to ex- 
haust each topic considered. It need not be elementary because 
the lectures which supplement it may be relied upon to clear up 
difficulties. On the other hand, it ought to give some account 
of the development of economic theories and of the views of 
the writers who have contributed most to this development. 

In writing the following treatise, I have tried to keep these 
considerations constantly in mind. The principal feature which 
distinguishes it from other college text-books is its full treat- 
ment of the subject of distribution. This is the part of the 
study which is of greatest interest and importance ; yet it is the 
part most neglected in current manuals. Experience as a 
teacher leads me to think that the difficulty of making the laws 
of distribution intelligible is exaggerated. Even if it were not, 
I should still consider a serious effort to instruct a class in these 
laws a most valuable exercise in economics. In the following 
pages I have tried to explain the productivity theory of dis- 
tribution and have made free use of the writings of my hon- 
oured colleague, Professor Clark, w^ho has contributed so much 
to an understanding of the subject. The fact that I still cling to 
a modernised Ricardian theory of rent, despite his criticisms of 



!\f Preface 

tiiat doctrine, and that I employ a somewhat different method 
for measuring the productiveness of labour and capital, does 
not lessen in the least my obligations to him. While making 
prominent the laws of competitive distribution, I have tried 
not to neglect the influence on actual distribution of monopoly, 
and have devoted four chapters to different phases of the 
monopoly problem. 

Another distinctive feature of the book is the introductory 
sketch of the rise and progress of modern industry in England 
and the United States. These chapters are designed to sug- 
gest the historical perspective so necessary to the judicial 
treatment of contemporary problems and, incidentally, to 
present some of the industrial facts which must otherwise have 
been deferred to later portions of the book. To secure space 
for this innovation, I have been compelled to omit the discussion 
of government revenues and expenditures usually contained in 
manuals of economics. I have done this the more willingly 
because within the last few years as many as three excellent 
treatises on public finance have appeared as fruits of American 
scholarship. 

The bibliographical note at the end of Chapter III. and the 
references for collateral reading appended to most of the chap- 
ters have been added for the guidance of general readers. 
Asterisks (*) have been used to distinguish the works that 
are especially recommended. 

So many and various are the obligations to other writers 
of which I am conscious, that a detailed acknowledgment is 
out of the question. I cannot, however, refrain from recording 
my special debt to my former teacher and colleague. Professor 
Patten, of the University of Pennsylvania. To his wholesome 
distrust of accepted opinions, so ably communicated to his 
students, I owe more than I can express. I must also ac- 
knowledge my indebtedness to Professor Marshall's standard 
treatise and to the works of Finance Minister von Bohm- 
Bawerk. 

Among those who have read portions of my manuscript, 
Professor J. F. Johnson of New York University has put me 
under special obligations by his criticisms. Any merit which 
may attach to the chapters on money and credit is largely due 



Preface v 

to him. My manuscript has also been improved b}^ the sug- 
gestions and criticisms of my colleague. Dr. A. S. Johnson, 
and to him my thanks are due for that most trying service 
which friendship can command, the correction and revision of 
my proof. Greatest of all is my indebtedness to my v^fe, who 
has helped me at every stage of the work. 

Columbia University, New York, 
December ij, igoj. 

PREFACE TO THE THIRD EDITION 

The principal change which has been made in this edition 
is the addition of two new chapters. Several instructors who 
have found the book adapted in other respects to their require- 
ments have expressed regret at the omission of the entire sub- 
ject of public finance. To remedy this defect the chapters on 
Public Expenditures and Public Revenues and on Taxation 
and Tax Reform in the United States have been insert-sd 
just before the concluding chapter. 

Another important change is the complete revision of the 
chapter on Production and Distribution. As the introduction 
to the somewhat difficult sections on distribution which follow, 
this chaper has an important role to play. I hope that in its 
amended form it may prove more satisfactory both to teachers 
and students. 

Among the numerous other changes and corrections that have 
been made in the text, two only require special mention. The 
statement of the law of diminishing returns as it applies to 
labour and capital {^72), has been made to harmonise with 
the statement of the same law for land (§64). The verbal 
inconsistency involved in the presentation of this important 
principle in the earlier editions was a source of confusion which 
is now removed. The other change is the omission of the sec- 
tions (§§287 and 288 in the former editions), in which a 
novel plan for combining a local land tax with a state inheri- 
tance tax was advocated. Further consideration has convinced 
me that the plan calls for fuller explanation than is possible in 
a general text-book, and has also made me less confident of 
its practicability. 



vi Preface 

Since this book was first printed there has been unusual 
activity in the publication of works on economics in the United 
States. While it has not been possible to refer to these in the 
text, I have tried to add all of the more important recent titles 
to the References for Collateral Reading appended to most of 
the chapters. 

Helpful suggestions to aid in the revision of the book for 
this edition have come to me from many quarters, and I am glad 
to have this opportunity to make general acknowledgment of 
my obligations. Especially valuable has been the assistance of 
Professor Roswell C. McCrea of Bowdoin College, who devised 
the' improved diagram which appears in Chapter IX. 

Jaffrey, New Hampshire, 
September JO, igoj. 



CONTENTS 

CHAPTER I 
The Rise of Modern Industry in England 



PAGE 



Economics Defined — Its Relation to other Sciences — Politics and 
Law — History — The Manorial System — Manorial and Modern 
Systems Contrasted — The Guild System — Merchant Guilds — • 
Craft Guilds — Change from Local to National .Regulation — 
The Black Death — Enclosures — The New System — Contrib- 
uting Causes — The National System — Debasements of the 
Coinage — Statute of Apprentices — Monopolies — The Mercan- 
tile System — The Industrial Revolution — Mechanical Inven- 
tions — Spinning — Weaving — Steam Transportation — The 
Laissez-faire Policy — Abolition of Restrictions — Rise of 
Factory System — Effects of Factory System — Conclusion, . l 

CHAPTER II 

The Industrial Expansion of the United States 

Colonial Period — Liberty, Private Proi>erty, and Equality — Slave 
vs. Free Labour — The National Industrial Ideal — Physical 
Characteristics of the United States — The Atlantic Seaboard 
— The Middle West — The Far West — The New Possessions^ 
Development of Transportation Facilities — Growth of Railroads 
— Crossing the Continent — Increase in Traffic — Growth of Pop- 
tilation — The Foreign and Native Born — The Distribution of 
the Population — The Negroes — The Foreign-Born — Concen- 
tration of Population in Cities — Agricultural Development of 
the United States — Invention of Improved Implements — 
Recent Changes — Principal Agricultural Products of the 
United States — Corn — Hay — Wheat — Cotton — Development 
of Mining Industries — Iron and Coal — Gold — Silver — Cop- 
per — Petroleum — Mineral Products, 1900 — Development of 
Manufacturing Industries — Manufactures of Iron and Steel — ■ 
Manufactures of Cotton — Concentration in Manufacturing— 
The Development of Foreign Trade — Changes in Exports — 
Summary — Conclusion, 20 



viii Contents 

CHAPTER III 
Preliminary Survey of the Field of Economics 

PACE 

The Motives to Business Activity — Characteristics of the Economic 
Man — Self-interest — The Larger Self — Love of Independence 
— Business Ethics — Utility — Free Goods — Economic Goods — 
Value — Relation between Utility and Value — Value in Use and 
Value in Exchange — Price — Production and Consumption — 
The State of Normal Equilibrium — Effort and Sacrifice In- 
volved in Production — The Cost of Production — Work and 
Pay — The World's Workers — Wages — Property and Its Earn- 
ings — The Methods of Economics — Deduction — Induction — 
Statistics — The Laws of Economics — Necessity of Recasting 
Economic Laws — Outline of Book — Conclusion — Bibliograph- 
ical Note, 46 

CHAPTER IV 

The Consumption of Wealth 

Characteristics of Human Wants — Law of Diminishing Utility- 
Present vs. Future Goods — Wants Determined by Social Stand- 
ards — The Law of Demand — The Law of Variety — The Law 
of Harmony — The Law of Least Social Cost — Adaptation of 
Consumption to the Environment — Adaptation to Tastes of 
Producers — Progress Due toChanges inTaste — Adaptation to 
Laws of Economical Production — Economical Consumption — 
Nutritive Value of Different Foods — Luxury — Necessaries for 
All before Luxuries for Any — The Point of View — Fallacies 
Respecting Luxury — Defensible Luxury — Saving vs. Spending 
— Statistics of Consumption — Consumption in the United States 
— Family Budgets — Two Aspects of Consumption — Conclusion, 63 

CHAPTER V 

Value and Price 

The Valuations of a Crusoe — Value in Use Depends on Marginal 
Utility — Valuations Refer to Units of Commodity — Qualifica- 
tions — Marginal Cost and Value — The Relation between Utility 
and Disutility — Surplus Utility — Marginal Utility and Value in 
Industrial Society — Different Goods Valued by Different 
Classes — Valuation even of Single Goods Complex — Valuation 
a Social Process— Marginal Cost and Value, in Industrial So- 



Contents ix 

PAGE 

ciety — Complications in Calculation of Social Cost — Valuation 
of Complementary Goods — Factors in Production Complement- 
ary Goods — Values in Use and Values in Exchange — Values 
in Exchange Expressed as Prices — Exchange Values Cannot 
Increase or Decrease — The Value of Money — Influences AflFect- 
ing It — The Determination of Prices — Buyers' Calculations — 
Sellers' Calculations — Four Possible Cases — One Buyer and 
One Seller — Several Buyers and One Seller — One Buyer and 
Several Sellers — Two-sided Competition — An Illustration — The 
Actual Practice — The One-price System — Market Prices — 
Normal Prices — Summary — Conclusion, 8i 

CHAPTER VI 

Prodtjction : Land and Natural Forces 

Production Defined — Manufacturing and Trading as Productive as 
Agriculture — Factors in Production : Nature and Man — Capital 
— The Productiveness of Land — Progress in Production — Dif- 
ferent Characteristics of Different Pieces of Land — Old and 
New Countries Contrasted — Differences in Expenses of Pro- 
duction Due to Differences in Land — Farming — Manufacturing 
— Conclusion — The Law of Diminishing Returns — Statement 
of Law — The Extensive and Intensive Margins of Cultivation 
— Other Differences in Lands — An Illustration — Suburban and 
Country Plots of Land Contrasted — City and Country Plots of 
Land Contrasted — Conclusion — Summary — The Rent of Land, 107 

CHAPTER VII 
Production : Labour and Capital 

Labour as a Factor in Production — Qualities Influencing Product- 
iveness of Labourer — Qualities are Either Inherited or Acquired 
— Health and Strength — Intelligence and Judgment — Ambition, 
Energy, and Perseverance — Imagination, Ingenuity, and Knowl- 
edge — Evolution and Production — Capitalistic Production — 
Advantages of Capitalistic Production — Capital Goods and Cap- 
ital — Fixed and Circulating Capital Goods — Specialised and 
Free Capital Goods — Fixed Capital Increasing — Capital Subject 
to Law of Diminishing Returns — Also Labour — Methods of 
Accumulating Capital — Saving and Investing — Borrowing and 
Investing — Borrowing Not Always for Investment — Capital 
Goods, Not Money, Saved — Buying Stocks and Bonds Does 
Not Add to Capital — Kinds of Capital Goods — Land and Cap- 
ital—Acquired Skill Is Not Capital— Dealers' Stocks Are 



X Contents 

PAGE 

Capital — Money — Progress in Capitalistic Production : The 
Middle Ages — The Growth of Commerce — Influence of the 
Industrial Revolution — Summary — Conclusion, . . . lao 

CHAPTER VIII 

Production : Co-operation and Business 
Organisation 

Co-operation in Labour — Varieties of Co-operation — Dependence of 
Co-operation on Development of Markets — The Influence of 
Improved Transportation Facilities — Qualities Necessary to 
Effective Co-operation — Such Qualities Developed by Co-oper- 
ation Itself — The Advantages of Co-operation — The Disad- 
vantages of Co-operation — Other Considerations — Methods of 
Gauging the Advantages of Co-operation — Statistics of Pin- 
making in 1776 and To-day — Progress Greatest in Manufac- 
turing — Business Organisation — The Entrepreneur — Qualities 
of a Good Entrepreneur — The Single Entrepreneur System — 
The Partnership — The Corporation — Advantages of the Cor- 
poration — Its Disadvantages: Diffused Responsibility — Misuse 
of Borrowing Power — Disregard of Public Interest — Practical 
Aspects of Corporation Problem — Large vs. Small Scale Pro- 
duction — Advantages of Large Scale Production — Division 
of Labour — Expensive Machinery — Advantages in Trans- 
porting Industries — Economy in Buying Supplies — Economy 
in Connection with By-products — Can Spend More on Ex- 
periments — Business Enterprises Classified — The Repre- 
sentative Firm — Summary — Relation between Production and 
Distribution^ 137 

CHAPTER IX 
Production and Distribution 

Distribution Concerned First with Money Return — Replacement 
Fund Deducted to Determine Money Return — Distribution of 
Money Income and of Real Income — Durable Consumption 
Goods Contribute to Real Income — The Net Product Consists 
Mostly of Unfinished Goods — The Real Income of Goods Ready 
for Consumption— The State of Normal Equilibrium— In which 
Net Products and Real Income are Interchangeable— Actual 
Society Tends Towards the Normal — Graphic Presentation of 
Foregoing Propositions— The Expenses of Production — The 
Replacement Fund — Insurance Premiums — Interest — Wages 
— Rent — Taxes— The Normal Expenses of Production — Normal 



Contents xi 

PAGE 

Prices Just Cover Normal Expenses— Market and Normal 
Prices — Production and Distribution — Causes of Poverty and 
the Theory of Distribution, ....... 155 

CHAPTER X 
Distribution : Net or Competitive Profits 

The Wages of Management — The Wages of Management Set a 
Minimum below Which Profits Will Not for Any Length of 
Time Fall — The Wages of Management May Be a Very Large 
Sum — Conditions Fixed for the Entrepreneur — The Power of 
Substitution — The Source of Profits Above the Wages of Man- 
agement — ^Price Fluctuations a Source of Profits — Explana- 
tion — Efforts to Control Prices — The Consequences of the 
Failure of Such Efiforts — Dealings in, " Futures " — Dealings 
in " Futures " Illustrated by Reference to Wheat — The Eco- 
nomic Function of Speculation — Speculation vs. Gambling — 
Conclusions — The Influence on Profits of Rising Prices — 
Of Falling Prices — Alternations between Prosperitj'- and 
Depression in the United States — The Influence of Discov- 
eries and Inventions on Profits — Increased Profits of Some En- 
trepreneurs Offset by Diminished Profits of Others — The Influ- 
ence of Improvements in Methods of Production on Profits — 
The Process by which Profits are Eliminated — Change a Cause 
of Profits — Profits and Losses the Normal Consequences of 
Progress — The Influence of the Variableness of Climate on 
Profits^ — Progress Dimmishes Man's Dependence upon Nature 
— Insurance as a Means of Escaping Consequences of Changing 
Natural Conditions — Profits and Los&es Tend to Balance Each 
Other — Profits and Rent — Profits in a New Country Usually 
in Excess of Losses — Practical Problem Connected with 
Profits Due to Exploitation of Virgin Natural Resources — The 
Influence of Changes in the Other Shares on Profits — The 
Effect of Changes in Wages — Summary — Conclusion, . . i6g 

CHAPTER XI 
Distribution : Monopoly Profits 

The Nature of Monopoly — Distinction between Monopoly and Dif- 
ferential Advantage — Buyers' Monopolies — The Kinds of Mo- 
nopoly — The Importance of Different Kinds of Monopoly in 
the United States — Monopoly vs. Competitive Industry — Limit- 
ations on the Power of Monopolies — The Power of Substitution 
— Sugar an Example — Substitution in Connection with a Rail- 
road — Potential Competition as a Check on Monopoly — The 
Case of the Single Village Store — Competition in Connection 



xii Contents 

FAGS 

with Railroads — The Fear of Governmental Interference a 
Check on Monopoly — Conclusion in Reference to Efficacy of 
Checks — The Law of Monopoly Price — A Patented Brand of 
Soap as an Example — Another Case — Law of Monopoly Pria/ 
Indicates the Limit of Price Rather than the Actual Price- 
Complications in Connection with Monopoly Prices — Practice 
of Asking Different Prices for the Same Goods Not Unusual — 
Final Statement of Law of Monopoly Price — Reasons for Con- 
cealing Monopoly Profits — Methods of Concealing Monopoly 
Profits — The Overcapitalisation of Monopolistic Corporations — 
Stock Watering — Difficulty of Measuring Monopoly Profits — 
Funded Income Defined — The Role of the " Innocent Invest- 
or " in Connection with Monopolies — Monopoly is Not Nec- 
essarily Antagonistic to Public Interest — Desirable Monopolies 
Should Be Regulated — Monopoly Profits Not Always Large — 
The Influence of Monopoly Profits on the Other Shares in Dis- 
tribution — Practical Phases of Monopoly Problem Treated in 
Later Chapters, i88 

CHAPTER XII 

Distribution : Rent 

Contrast between Profits and Other Shares in Distribution — The 
Nature of Rent — Problems Connected with Rent — The Source of 
Rent — The Principal Grades of Land Distinguished — Store Sites 
— Residence Sites — Plots Devoted to Truck-Farming — Farm 
Land — Grazing Land — Fertility as Important as Situation in De- 
termining Rent — The Demand for Land of Dififerent? Grades — 
Rent Includes Usually a Marginal as well as a Differential 
Element — The Calculation of Rent — Summary of Explanation 
of Rent — Graphic Representation of the Theory of Rent — 
The Rent of Land of Grade D — The Total Rent — Other Causes 
of Rent — The Rent of Sources of Water Power — The Rent of 
Mines — Apparent Exceptions to the Law of Rent — The No- 
rent Margin Found in Connection with Various Uses of 
Land — The Rotation of Crops Complicates, but Does Not Con- 
tradict the Law of Rent — The Average Return the Basis for 
Calculating Rent — Land Fit Only for One Use May Command 
High Rent — Other Exceptions — Obstacles to the Exact Cal- 
culation of Rent — Investments of Capital in Land and Rent — 
The Capitalisation of Rent — Rent a Funded Income — Summary 
of the Theory of Rent — Includes Usually a Marginal as well 
as a Differential Element — But May Be Calculated as a Dif- 
ferential from the Intensive No-rent Margin — A Surplus 
Income — Does Not Arise Where Best Land is Superabundant 
—Its Relation to Law of Diminishing Returns — Return fror© 



Contents xiii 

PAGE 

Permanent Improvements Subject to Law of Rent — Prioe of 
Land — Rent Capitalised at Current Rate of Interest — Actual 
Rent Differs from Economic Rent — The Metayer System — The 
Rent of Buildings Distinct from Ground Rent — Importance 
of Rent in United States — Rent as a Source of Income in 
Great Britain, 205 

CHAPTER XIII 

Distribution : Wages 

\¥ages Defined — The Wages Question — Differences in Rates of 
Wages Due to Varying Capacities of Working Population — 
Differences Determined in Same Way as Rents — The Relation 
between Members of Different Groups — Tendency towards 
Uniformity of Wages in Each Grade — The Different Grades 
into which Workmen Are Divided Overlap — Workmen below 
the Margin of Their Group — In Practice the Number of Grades 
of Workmen is Very Large — The Causal Relation between 
Marginal and Higher Wages — The Rate of Wages Depends on 
Demand and Supply for Workmen of Each Given Grade — Dif- 
ferences in Wages Perpetuated by the Immobility of Labour — 
Efficiency and Time Wages Contrasted — Other Causes of Dif- 
ferences in Wages — Differences in the Cost of Living — Differ- 
ences in Cost of Mastering Different Trades — Differences in 
Agreeableness of Different Occupations — Allowance for Dan- 
gers Incurred — Allowance for Chance of Success — Social Esteem 
a Factor — Also Regularity of Employment — Finally Chances 
of Promotion Considered — Competition Would Make Advan- 
tages of Different Employments Equal if Men were Exactly 
Alike, but They are Not — The Influence of Heredity Indeter- 
minate — The Influence of Habit, Custom, and Education — Dif- 
ferences in Standards of Living Perpetuate Differences in 
Wages — ^Educational Opportunities Enjoyed by Children 
in First Grade — Children of the Middle Class — Their Choice of 
Occupations — Standards of Living Not Rigid — Children in the 
Third Grade — The Fourth Grade — The Fifth Grade — Non- 
competing Groups — Reasons for Failure to Invest More Cap- 
ital in Education — Conclusion — The Determination of Marginal 
Wages, 222 

CHAPTER XIV 

Distribution : Interest 

Interest Defined — Interest, Rent, ^nd Wages — Differences in Rates 
of Int'irest — The Mobility of Capital Depends upon the Re- 
placement Fund — Differences in Rates of Interest Eliminated 



xiv Contents 

PAGX 

by Competition — Differences in the Same Branch of Produc- 
tion — Differences in Different Branches of Production — 
Causes of Differences in Rates — Monopoly — Interest on 
Permanent Improvements — Specialised Forms of Capital 
Have Little Mobility over Short Periods — And Are Conse- 
quently Liable to Depreciate — Differences in Risk of Loss — 
Differences in Social Esteem — Differences in Rates between 
Different Sections — Interest on Money — Reasons for the Pay- 
ment of Interest for the Use of Money — Money or Pur- 
chasing Power the Form first Assumed by the Replace- 
ment Fund — Interest on Money — Loans Made Uniform in 
Each Money Market — Differences in Risk Cause Differences 
in Rates of Interest — Differences in Rates of Interest Less 
Extreme than Differences in Wages — How Marginal Wages 
and Marginal Interest are Determined — Marginal Rates May 
be Studied at the Margin of Cultivation — Entire Return at 
the Margin Constitutes Wages and Interest — The Circum- 
stances Determining the Amount of the Joint Share — The 
Influence of Entrepreneurs — Qualities and Quantities of 
Workmen and Capital Goods Important — Both Wages 
and Interest High in the United States — Workmen and 
Capital Goods Compete as well as Co-operate — ^This Com- 
petition Leads to Comparisons and Substitutions by which 
Wage and Interest Rates are Determined — The Law of 
Distribution for a Society in the State of Normal Equilib- 
rium — The Same Law Applies Roughly to Actual Industrial 
Society — The Law of Distribution Illustrated — An Increase of 
Capital Increases the Marginal Productiveness of Labour — 
The Mutual Interdependence of Shares in Distribution, . 244 

CHAPTER XV 

Value, Price, and Distribution 

Summary of Theory of Value — Exchange Value and Price — The 
Law of Price — Relation between Incomes of Consumers and 
the Expenses of Production — The Influence of Monopoly upon 
the Shares of Income Secured in Competitive Industries — 
Graphic Representation of Production and Distribution — 
Restatement of the Law of Rent — Restatement of the Law 
of Wages — The Wages of Marginal Workmen — The Law of 
Interest — The Calculation of the Replacement Fund — The 
Life Period of a Capital Good Depends upon Rates of Wages 
and Interest — ^The Law of Interest Applies to Gross Earn- 
ings of Capital Goods — Restatement of the Law of Com- 
jjetitive Distribution — The Same Law Generalised — True 



Contents xv 

PAGE 

kelation between Expense of Production and Value — The 
Determination of Shares in Distribution a Complex Form 
of Valuation — The Productivity Theory of Distribution — 
The Exchange Theory of Distribution — Interest a Discount 
on Future Goods — The Exchange Theory True from View- 
point of Lenders — The Sense in which Capital Goods are 
Productive — Exchange and Productivity Theories Comple- 
mentary, Not Contradictory — The Wages-fund Theory — 
Conclusions Drawn from the Wages-fund Theory — 
Criticism of the Theory — Other Objections, and Con- 
clusion, 265 

CHAPTER XVI 

Value, Price, and Distribution (Concluded) 

Ultimate Determinants of Distribution — Statistics of Population- 
Significance of These Statistics — Birth, Death, and Marriage 
Rates of Principal Countries — Comment on the Table — The 
Malthusian Doctrine of Population — Influence of the Doctrine 
on Economic Thought — Criticism of the Doctrine — Premisses 
in Reasoning about Population — The Physiological Check — ' 
The Influence of Social Customs — The Economic Check — The 
Influence of the Standard of Living — A Stationary Popula- 
tion — Conditions Necessary to a Low Birth-rate — Causal 
Relation between the Standard of Living and Wages in the 
United States — Population Should Grow at the Top, Not the 
Bottom — The Influence of Immigration and Emigration — • 
The Growth of Population Controlled by Standards of Liv- 
ing — The Growth of Capital — The Growth of Wealth in the 
United Kingdom — In the United States — Growth of Ag- 
ricultural and Manufacturing Capital — Necessary Cautions — 
Present Preferred above Future Goods — Reasons for this 
Preference — The Motives to Saving — Progress Strengthens 
These Motives — The Ultimate Determinants of Distribu- 
tion — The Balancing of Utilities against Disutilities, . . 283 

CHAPTER XVn 

Money and the Monetary System of the United 
States 

The Disadvantages of Barter — The Nature and Functions of 
Money — Money a Standard of Value — Also of Deferred Pay- 
ments — Prices and the Value of Money Vary Inversely — Sta- 
bility of Value a Desirable Attribute of Money — Various Com- 
Tiodities Used as Money in the Past — Qualities Needed in a 



xvi Contents 

VhOK 

Good Money — The Role vi^hich the State Plays in Connectioa 
with Money — Coinage and the Printing of Paper Money — 
Standard, Token, and Credit Money — Gresham's Law — An 
Illustration — Gresham's Law and the Present Monetary Sys- 
tem of the United States — The Adoption of the Gold Standard 
in Europe — Its Adoption Outside of Europe — Monetary His- 
tory of the United States — The Gold Standard Law — Present 
Monetary System of the United States — Gold Coin Kept at a 
Constant Parity in Value with Gold in Coin — ^How the Parity 
between Gold and Silver Coin Is Maintained — History of 
United States Notes — The Gold Reserve — National Bank 
Notes — Stability of the Gold Standard — The Limping Stand- 
ard — The Silver Hoard — Objections to Sale of Silver Dol- 
lars — The Function of Token Money — Token Money of the 
United States — The Function of Credit Money — Objections 
to Credit Money — Credit Money of the United States — 
Conclusion, 302 

CHAPTER XVIII 

Credit and Banking 

The Nature of Credit — Book Credit — The Banking Business — 
Based on Confidence — The Check System — Checks and Drafts 
— Money and Credit — Importance of Deposits to Banks — Forms 
of Bank Loans — Call and Time Loans — Banks Lend Their 
Credit by Means of Deposit Accounts — Or Bank Notes — Inter- 
est on Bank Loans — Paid for Control over Capital — Gold 
Coin is Capital — Credit is Not Capital, but it does the Work 
of Standard Money — Limitations on the Use of Bank Credit — 
Interest on Call Loans Usually Low — Short-time Loans- 
Competition Adjusts Bank Rate of Interest to General Rate 
— Ought Banking to be Regulated? — Reasons for Favouring 
Regulation — Hisfory of the National Banking System — The 
Present Law — Protection for Depositors — Faults in System — 
United States Bank Notes are Perversely Elastic — Freer 
Note Issue Necessary — Defect in Reserve Requirements — 
State Banks — Savings Banks — Trust Companies — Conclu- 
sion, 323 

CHAPTER XIX 
Some Unsettled Monetary Problems 

Unsettled Problems — The Value of Gold and Prices — Demand icn 
Gold in Arts — Monetary Demand — Not Unlimited — Money and 
Credit — Recent Fluctuations in Monetary Demand — The Re- 



Contents xvii 

PAGE 

serve Demand — Conclusion in Reference to Demand — The Sup- 
ply of Gold — Probable Future of Gold Supply — Measuring the 
Value of Money by Method of Index Numbers — Defects in the 
Method — Relation between Value of Money and Level of 
Prices — Price Statistics — Reasons for Fluctuations in Prices. — 
The General Trend of Prices — Statistics Not Exact — Interna- 
tional Bimetallism — The Time for it Probably Passed — The 
Silver Question in the United States — The Probable Conse- 
quences of the Free Coinage of Silver — The Future of the 
Gold Standard — The Multiple Standard, .... 34S 

CHAPTER XX 

Foreign Exchange and the Tariff Question 

The Nature of Foreign Exchange — Anglo-American Trade — Ster- 
ling Exchange — The Gold Points — The Rate of Sterling Ex- 
change — The Rate of Interest and Foreign Exchange — Prices 
of Stocks and Foreign Exchange — Prices of Commodities and 
Foreign Exchange — Ways of Quoting Foreign Exchange — 
Three-cornered Exchanges — Exchanges between Gold and 
Silver Standard Countries — A Country's Gold Supply Reg- 
ulates Itself — ^The United States Should Normally Export 
Gold — Foreign and Domestic Trade Compared — Peculiarities 
of Foreign Trade — Principle Controlling Foreign Trade — 'The 
Policy of Protection — The Advantages of Free Trade — Historsf- 
of Protection in the United States — The Home-market Argu- 
ment — The Infant-industry Argument — Argument of List- 
Protection in the United States Since the Civil War — The 
Wages Argument — Political Ideal of Protectionists — The 
Tariff of 1897 — The Burden of Protection — Complexity of the 
Tariff Question — Present Status of the Tariff Question in the 
United States — The Strength of Protection — Opposition to 
Protection to Trusts — Folly of Protecting Ebcploitation of Lim- 
ited Natural Resources — The Burden of Protection to Pro- 
ducers for Export — Retaliatory Tariffs — The Future — Free 
Trade — The Present Trade Policy of the United Kingdom — 
The Free-trade Movement, i860- 1870 — The Protectionist Re- 
action — The Present Outlook Abroad, . . . . . 361 

CHAPTER XXI 
The Labour Movement 

Obstacles to Free Competition in the Labour Market — The Dis- 
advantages of Wage-earners as Bargainers — Competition by 
Employers an Active Force — Nature of the Labour Movement 
— Objects of Labour Unions— The Membership of American 



xviii Contents 

PAGE 

Unions — Of British Unions — ^Importance of Legal Questions 
— The Development of Trade-union Law in th« United King- 
dom — Growth of Unions — English Law of Conspiracy — Labour 
Unions Liable for Damages — The Law in Reference to Labour 
Unions in the United States — The Influence of English Prece- 
dents — The Benefit Features of Labour Unions — Collective 
Bargaining — Employers' Objections to Collective Bargaining — 
Conclusion — Strikes and Lockouts — Use of the Boycott in the 
Coal Strike — Difficulty of Enforcing Law during Strikes — 
Plans for Avoiding Strikes — ^Trade Agreements — State Board 
of Conciliation and Arbitration — Reasons for Government In- 
terference — Compulsory Arbitration — New Zealand's System — 
The System of New South Wales — Use of the Injunction in 
Connection with Strikes — Legal Justification — Extension of 
Scope of Injunctions — Reasons for Opposing Resort to Injunc- 
tions — The Influence of Labour Unions on Wages — The Case 
of Open Unions — Labour Unions Sometimes Monopolies — ■ 
State and Federal Laws Helpful to Unions — Monopolistic 
Unions to be Condemned Like Other Monopolies — Educational 
Work of Labour Unions — Schools of Citizenship — Active in 
Securing Needed Labour Laws — The Future of the Labour 
Movement, 385 

CHAPTER XXII 

The Legal Regulation of Labour 

Reasons for the Legal Regulation of Labour — Employees Do Not 
Always Bargain on Equal Terms with Employers : Children — 
Women — Men — Dangerous Trades— Purpose of Protective Laws 
— History of Labour Legislationin Great Britain — 1802-1831 — 
Act of 1833 — Mining Act of 1842 — The Present Law — Constitu- 
tionality of Labour Laws in the United States — Conflicting 
Decisions of American Courts — Decision in Utah Eight-hour 
Law Case — Value of this Precedent — Child-labour Laws in 
the United States — Purpose of SuchLaws — Laws Regulating 
Labour of Women^ — The Agitation for a Universal Legal 
Eight-hour Day — Objections to Plan — Restrictions of Labour 
of Men Defensible — The Sweating Evil — Conditions in the 
Clothing Trades — Remedies Tried in Great Britain and the 
United States — Australasian Experiments — Conclusion — The 
Regulation of Dangerous Trades — System in Great Britain 
— Employers' Liability in the United States — The Workmen's 
Compensation Act of Great Britain — Continental Systems — 
Backwardness of the United States in This Field — Arguments 
for and against the Legal Regulation of Labour — Need of 
Uniformity in the United States — The Future, . . . 412' 



Contents xix 

CHAPTER XXIII 
Legal and Natural Monopolies 

Importance of the Monopoly Problem — Public Legal Monopolies — 
Purposes of Such Monopolies — The United States Post-office 
— Private Legal Monopolies in Great Britain — In the United 
States — The Patent System — Arguments for and against Pat- 
ents — Objections Answered — Proposed Reforms in the Patent 
System — Patents as a Source of Monopoly Profits — Registered 
Labels and Trade Marks — The System of Copyright — Defects 
of American Law — Natural Monopolies in the United States — 
Natural Monopolies of Situation — The Anthracite Coal Com- 
bination — Its Present Status — Need of Regulation — Other Mo- 
nopolies of Situation — Natural Pt/Ionopolies of Organisation — 
The Business of Supplying Water — The Gas and the Electric 
Light Monopolies — The Street Railway Monopoly — Reasons 
for Combination — Advantages of Combination — The Telephone 
Monopoly — Advantages of Monopoly — Methods of Increasing 
Telephone Rates — Monopoly Profits of Municipal Monopolies 
in the tfnited States — Such Profits Now Capitalised — The So- 
lution of the Municipal Monopoly Problem — Arguments for 
Public Ownership — Against Public Ownesship — Other Con- 
siderations — Situation in the United States — In Europe — Meth- 
ods of Regulating Municipal Monopolies — Obstacles to Regula- 
tion in the United States, . 434 

CHAPTER XXIV 

The Railroad Problem in the United States 

National Monopolies of Organisation — CirGumstances Making the 
Railroad Business Moriopolistic — Progress toward Concentra- 
tion in the Railroad Business in the United States — Discrim- 
ination in Railway Rates — Between Commodities — Between 
Places — Between Persons — Reasons for Discriminations — Case 
■of the South Improvement Company — Monopoly Profits from 
the Railroad Business in the United States — National Regu- 
lation — The Interstate Commerce Act — Defects in the Act — 
Its Interpretation by the Courts — Amendment of 1903 — Argu- 
ments for and against National Operation of Express and 
Telegraph Businesses — Arguments for National Ownership 
and Operation of the Railroads — Argument against the Pol- 
icy — Other Considerations— Need of Reform in Interstate 
Commerce Act — Changes Recommended by the Commission, 460 



XX Contents 



CHAPTER XXV 

Capitalistic Monopolies, or Trusts, 
IN THE United States 

PAGE 

Capitalistic Monopolies or Trusts — Motives for Organisation of 
Trusts — The Early Trusts — The Present Trusts — Organisation 
of the United States Steel Corporation — The Earlier Trusts — • 
Progress of the Trust Movement — The Motives of Manufac- 
turers — The Activity of Promoters — Reasons for Formation of 
Steel Trust — Distrust of Trusts on the Part of the Public — 
The Successful Trusts — Extent of Control of Trusts over 
Production — Resulting Control over Prices — Limits to this 
Control — Conflicting Opinions in Reference to Trusts — Econ- 
omies Effected by Trusts — Reduced Expenses for Advertising 
— Saving in Cross Freights — Better Adaptation of Production 
to Demand — Minor Advantages — Illegitimate Practices of the 
Trusts — Obtaining Rate Discriminations from Railroads — 
Price Discrimination among Places — Unfair Contracts with 
Dealers— The Tariff and the Trusts— The Tariff the Mother of 
Some Trusts — Other Evils — Overcapitalisation — Corruption 
of Public Officials — Excessive Prices for Trust Products — The 
Constitutional Obstacle to Legal Regulation of the Trusts — 
The Common Lavir — Anti-Trust Legislation — The Ohio Act 
of 1898— Futility of Anti-Trust Acts— The Present Status of 
the Trusts — Published Reports novi^ Required by National Gov- 
ernment — Plans for Securing Legal Control over the Trusts — 
Such Control Should be Exercised by the Federal Government 
— Voluntary Federal Incorporation Advocated — The Regula- 
tions Needed — Suppression of Practices Leading to Unfair 
Competition — Reform of Tarifif on Trust Products — The 
Future of the Trusts — Power of Substitution a Weapon for 
Controlling Monopolies, 476 

CHAPTER XXVI 
Plans of Economic Reform 

Four Plans of Economic Reform — Profit-sharing — Objections tc 
the Sliding-scale System — Objections to Sharing Losses — Other 
Plans of Profit-sharing — Labour Copartnership — in Great 
Britain — The English Co-operative Wholesale Society — The 
Scottish Society — Present Status of Copartnership — Reasons for 
Backwardness of the United States — Reasons for Success and 
Failure of Co-operative Experiments — The Future of Labour 



Contents xxi 

PAGE 

Copartnership — Land Nationalisation — Advantages of Private 
Property in Land in Great Britain — In the United States — The 
Present Problem — Evils of Absentee Landlordism — The Situ- 
ation in the United States — The Single Tax — Objections to the 
Single Tax — It Is Inadequate — It Would Involve Wholesale 
Confiscation — Conclusions as to Single Tax — Socialism — Com- 
munism — Plans for Realising Socialism — Economic Advan- 
tages of Socialism — Moral Advantages — Objections to Social- 
ism — Difficulty of Apportioning Labour Force Economically — 
Difficulty of Valuing Goods — Difficulty in Connection vi^ith 
Capital — Progress under Socialism — Conclusion — The Social- 
ism of Karl Marx — Criticism — Conclusion, 510 



CHAPTER XXVII 

Government Expenditures and Government 
Revenues 

Importance of Public Finance — Government Expenditures in 
United States — For Education — For Defence — For Protection 
— For Charitable Relief — For Industrial Purposes — For De- 
partments of Government — Miscellaneous — Government Ex- 
penditures Designed to Promote the General Welfare — Public 
"VS. Private Expenditures — Division of Governmental Functions 
in United States — Corresponding Division of Expenditures — 
Relative Importance of Public and Private Expenditures in 
United States — Sources of Public Revenues — From Public 
Lands — From Public Industries — From Special Assessments 
and Taxes — From Loans — War Loans — Industrial Loans — De- 
ficiency Loans — Restrictions on Borrowing Power in United 
States — Revenue from Gifts— From Fines and Fees — Defini- 
tion of a Tax — Taxation Should Fall on Each in Proportion to 
Ability — The Equal Sacrifice Theory — Principal Taxes in 
United States — Tax Provisions of Federal Constitution — Shift- 
ing and Incidence of Taxes — Incidence of Customs and Excise 
Taxes — Property and Poll Taxes — Evasion of General Property 
Tax — Evidence of Evasion — Incidence of General Property Tax 
— Classification of General Property Tax — Tax on Land Paid 
by Land Owner — Capitalisation of Land Taxes — An Example 
— Old and New Land Taxes Contrasted — Tax on Buildings 
Paid by^Occupiers — On Mortgages by Borrowers — Injustice of 
Personal Property Tax — Conclusions — Corporation Taxes — 
Gross Receipts Taxes — Net Income Taxes — The Special Fran- 
chise Tax of New York State-— Its Resemblance to Land Tax 
— Liquor License Taxes — Inheritance Taxes, . . . .5; 



xxii Contents 



CHAPTER XXVIII 
Taxation and Tax Reform in the United States 

PAGE 

Practical Aspects of Taxation — The Tariff of United States — Cus- 
toms and Internal Revenue Duties Compared — Advantages of 
Internal Revenue System — Substitution of Corporation Taxes 
for General Property Tax — Unequal Assessments — Disad- 
vantages of General Property Tax — Taxing System of New- 
York State — Corporation Taxes — The Special Franchise Tax — 
Inheritance Taxes in United States — And Abroad — Justification 
for Progressive Rates — Advantages of Inheritance Taxes — The 
British Income Tax — State Income Taxes — The Federal In- 
come Tax — The Incom.e Tax of 1894 Unconstitutional — Argu- 
ments for and against Federal Income Tax — Place of Taxation 
in Theory of Distribution — Three Classes of Taxes Distin- 
guished — Conclusions as to Land and Special Franchise Taxes 
— Conclusions as to Customs and Excise Taxes — As to Inheri- 
tance, Income, and General Property Taxes — Difficulties in 
Way of Tax Reform — Tax Problem of Cities — Reform of 
Federal Revenue System — Of State Taxation — General Prop- 
erty Tax Abolished — Inheritance Taxes Extended — Corpo- 
ration Taxes Advocated— High License System Extended — 
Real Estate Tax — Special Franchises — License Taxes — Con- 
clusions as to Municipal Taxation— General Conclusion, . . 563 

CHAPTER XXIX 

Economic Progress 

The Nature of Economic Progress — Changes in Wages and Hours 
of Labour — Progress in Consumption — Increased Variety — 
Increased Harmony — Reduced Costs — Increased Economy — 
Consumers' Leagues — Progress in Production — Progress in 
Distribution — Reasons for Persistence of Low Wages — Influ- 
ence of the Growth of Population — Economic Justification of 
Competitive Profits — Pilonopoly Profits — Rent and Interest — 
Justification of Rent — Justification of Interest — Unequal Dis- 
tribution of Wealth Results from Inequalities among Individ- 
uals — Inheritance Taxes — Progress in the Future — The Func- 
tion of Labour Unions— Of Labour Laws — The Regulation of 
Monopolies — Of Housing Conditions — Free Public Schools — 
Tax Reform — Progress Depends on the Individual — Probable 
Course of Wages, Interest, and Rent in the Future — Economic 
Progress and the Moral Elevation of the Race — The True Goal 
of Economic Progress — Conclusion, 589 



CHAPTER I 
THE RISE OF MODERN INDUSTRY IN ENGLAND 

§ I. Economics, or political economy, is the social science Economics 
which treats of man's wants and of the goods (t. e.^ the 
commodities and services) upon which the satisfaction of 
his wants depends. It analyses wants, classifies goods with 
reference to them, and considers ail of the circumstances which. 
affect the production and distribution, or sharing, of goods 
among the individuals who compose society. In discussing 
production and distribution economists treat the same prob- 
lems that engage the attention of business men, but from a 
social rather than an individual point of view. It is to em- 
phasise this distinction that economics is styled a " social 
science." A definition easy to remember is that economics is | 
the " social science of business." ' 

§ 2. Closely related to economics are the other social ^^ Rela» 
sciences, sociology, politics, law, and history. By some writers other 
sociology is made to include all of the social sciences, not ex- Sciences 
cepting economics. Others define it as the science which treats 
of the beginnings of society and of the first principles of social 
organisation. Still a third group understands the term to 
include problems connected with society's treatment of its 
dependent classes. Whichever of these definitions is accepted, 
the relation of sociology to economics need cause no confusion. 
The latter has to do primarily with contemporary conditions 
and with the relations between independent, self-supporting 
individuals and families, and the goods upon which their well- 
being depends. 



Politics 
and Law 



History 



The Mano- 
rial System 



2 Rise of Modern Industry in England 

Politics treats of the political organisation of society, and law 
is the aggregate of rules and regulations through which format 
expression is given to the social will. Neither is likely to be 
mistaken for economics, although both influence largely the 
business institutions and practices with which economics is 
concerned. The political organisation determines what classes 
shall have a dominant influence in choosing the laws that are 
to be passed and enforced, and laws themselves establish stand- 
ards to which all must conform. The solution of most of the 
practical economic problems which are discussed in later sec- 
tions of this work will be found to hinge upon the repeal of 
unwise laws or the enactment of wise ones. 

History, in the broadest sense, is the narrative of past events. 
To the economist economic or industrial history, the narrative 
of past events touching relations between men and goods, is 
of special significance. In fact, a knowledge of the principal 
facts of modern industrial history is so necessary to an 
understanding of present economic phenomena that it has 
seemed wise to introduce this work with a sketch of the Rise 
of Modern Industry in England, and of the Industrial Expan- 
sion of the United States. 

§ 3. The earliest form of industrial organisation of which 
we have full knowledge from English history is the " mano- 
rial " system. In existence before the Norman Conquest, it 
was not entirely superseded until the sixteenth century, 
and, therefore, controlled English industrial activity for a 
longer period than any system which has since developed. To 
understand it clearly it is necessary to remember that during 
the period when it flourished international intercourse took 
the form of fighting more commonly than that of trading, that 
each country was economically self-sufficient or nearly so, and 
that in order to maintain itself each community was forced by 
its ignorance of efficient industrial processes to give nearly all 
of its time to providing for the satisfaction of its primary 
wants, for food, clothing, and shelter. The manorial system 
was thus, on one side, a method of organising the nation for 
military purposes and, on the other, a plan for securing the 
cultivation of the soil. It is the latter aspect which interests 
the economist. 



The Manorial System 3 

The manorial system was at its height about the middle 
of the thirteenth century. At that time the whole culti- 
vated portion of England was divided up into estates or 
" manors " averaging about 5000 acres in extent. The 
actual work of tillage on these manors was performed for 
the most part by serfs or " villeins," whose position was, from 
our modern point of view, peculiar. The villein was not a 
slave, and yet he could not legally leave the place in which he 
was born or neglect his customary work without the consent 
of the lord of the manor. On the other hand, although he did 
not own the allotment of land which he cultivated, he 
was entitled to it by immemorial usage and might appeal to the 
manorial court for redress if it was withheld from him. The 
method of tillage was even more remarkable. Instead of being 
divided up into a number of separate farms or allotments, each 
to be cultivated independently and continuously by the same 
tenant, the arable land of the manor was divided up into three 
great fields, hundreds of acres in extent, each one of which 
was planted with a single crop. The usual practice was to sow 
one field with wheat or rye, another with oats or barley, and to 
allow the third to lie fallow as a preparation for the heavy crop 
to be grown the following year. The ordinary allotment made 
to a villein was some thirty acres, assigned usually in half-acre 
or acre strips from different parts of the farm. By this plan 
the villein was enabled to participate in the different kinds of 
agriculture carried on in the different fields, while at the same 
time he received a share of the good as well as of the poor 
land. He paid for his allotment, not with money, but with 
labour, and the amount of labour was fixed by immemorial cus- 
tom. 

The most important labour was " week-work," i. e., work 
on the land which the lord retained for himself for two or 
three days each week throughout the year, and " boon-day " 
work or continuous work on the lord's land for one or two 
weeks during the ploughing season and the season of harvest. 
In addition certain presents and special services were required 
of the villein at stated seasons. 

The maporial system was so different from that which now 
prevails in the Western World that it will be desirable to indi- 



Manorial 
and 
Modern 
Systems 

Contrasted 



4 Rise of Modern Industry in England 

cate some of the more important points of contrast. In the 
first place, fully nine-tenths of the population of England lived 
in the country on these manorial estates, and the larger part 
consisted of the villeins and their families. To-day in Great 
Britain nearly two-thirds of the people live in cities of 10,000 
or more inhabitants. Secondly, most of the inhabitants of the 
manor were condemned to live and die where they were born, 
and few of them ever visited other places or came in contact 
with other ways of living. The difficulty and danger of travel, 
the scarcity of money and other forms of wealth that might be 
treasured up and easily transported, and the poverty of those 
of the villein class, were all conditions serving to reinforce the 
legal obstacles to the free movement of population from one 
part of the country to another. It was a rigid system of status 
in which children were forced to follow in the footsteps of their 
fathers and only those of rare ability could hope to rise above 
the positions to which they were born. Thirdly, each villein 
family produced for itself practically everything it required. 
The few exchanges in which villeins participated consisted in 
the barter of their products for the small quantities of salt, iron, 
and other foreign goods, which they needed and could not pro- 
duce for themselves. Under these circumstances the stimulus 
of competition, so active where production is for the general 
market, was almost entirely absent. The result was that slow 
development of industrial processes which made the perpetua- 
tion of the system for so many centuries possible. The crops 
to be sown and the methods of cultivation had become matters 
of tradition and the idea of improving upon the wisdom of the 
fathers touching these subjects was foreign to the thought of 
the age. Thus generation followed generation, dividing up the 
land in the same way, using the same crude implements, sub- 
sisting on the same sorts of food, dwelling in the same sorts of 
houses, and wearing the same sorts of clothes. Fourthly, as 
already stated, money was almost unknown to dwellers on 
the manorial estates. Between the products of their labour and 
the commodities they themselves desired, there was no confus- 
ing intermediary to leave them uncertain whether they were 
receiving all to which they were entitled. Thus the mediaeval 
state was largely relieved of one of the most serious economic 



The Guild System 5 

responsibilities of a modern government, the duty of supplying 
a good medium of exchange. 

§ 4. Contemporaneous with the manorial system in the coun-^The Gni 
try was the guild system in the town. To understand the latter t^y^t^ni 
it is necessary to remember that towns grew up as centres 
of trade and that their populations were made up in part of 
persons who had broken away from the restraints of manorial'''" 
life. The result was constant friction between the inhabitants 
of the towns and the nobles who so largely dominated the coun- 
try. At the same time there was in progress a struggle be- 
tween the latter, who were jealous of the royal power, and the 
king, which made an alliance between king and townspeople 
so natural as to be almost inevitable. The king guaranteed the 
dwellers in the towns special privileges, confirmed usually by 
royal charter, while in return the townspeople promised special 
contributions to the royal exchequer and unswerving loyalty in 
time of emergency. 

Since trade was the primary purpose of the town, trading Merchan 
privileges were those first demanded, with the result thatjG'ii^^ 
practically whole towns were incorporated as trading or! 
" merchant guilds." The privilege was usually confined to 
a monopoly of trade in all but the most necessary articles 
within the town itself. Often, however, the privilege 
embraced the trade in certain products in other towns or 
even throughout the kingdom. Interesting features of 
the merchant guilds were the minute rules by which they 
regulated the conduct of their members in reference to 
buying and selling. In this respect they were not unHke 
modern stock exchanges, except that the rules of the strictest 
exchange are lax in comparison with those of the merchant 
guild. The purpose of the rules of the latter was to promote 
fair dealing, fraternal relations between members, and, in gen- 
eral, a regard for the interests of the trade as a whole, in place 
of exclusive regard for individual gain in special transactions. 
Such matters as the times and places for holding particular 
markets, the qualities of goods to be dealt in, and the methods 
of bargaining to determine prices came in for special regula- 
tion. The enforcement of these rules was entrusted to wardens 
or inspectors appointed from guild members, and the punish- 



Change 
from Local 
to National 
Regulation 



6 Rise of Modern Industry in England 

ments inflicted on transgressors ranged from public censure 
to fine, imprisonment, and expulsion from the guild. 

As the towns grew they came to be the seats of various 
handicrafts, and within one hundred years after merchant guilds 
were organised " craft guilds " began to be formed. These were 
unions of the artisans engaged in each particular handicraft 
and were designed partly to promote honest work, fraternal 
relations, etc., as in the case of the merchant guilds, and partly 
to secure for their members the right to trade in their own 
products. Like the merchant guilds, the craft guilds formu- 
lated and enforced most minute regulations concerning the con- 
duct of their members. Thus, night work vv^as frequently pro- 
hibited, weights and measures were regulated, and the adulter- 
ation of goods was forbidden. 

As voluntary associations of nominal competitors both mer- 
chant and craft guilds undertook to restrain competition in the 
interest of the whole trade. They rendered for their members 
many of the services, such as protecting their persons and prop- 
erty, which are now performed by the state or government ; but 
in addition they bound their members not to pass beyond cer- 
tain limits in their competition with their guild brothers lest the 
interests of the corporate group should suffer. Thus in the 
towns, as in the country, competition was much restricted at 
this period and in its place local customs and local regulations 
largely determined the direction of industrial activity. 

In the towns the institution of private property was more 
highly developed than in the country, since most town wealth 
was personal and the effective utilisation of town land re- 
quired it to be more completely under the control of the person 
using it. At the same time, a town " common," or piece of 
land used in common by all the townsfolk, was a usual feature 
of town organisation, and in other ways the original connec- 
tion of the towns with the manors was shown. 

§ 5. The decay of the manorial system and of the guilds 
was so gradual that it is difficult to trace its progress. The 
first great change was a substitution of money payments for 
the labour dues formerly required of villeins. This was part 
of a general substitution of money exchanges for barter in 
all departments of industrial life and probably did more than 



The Black Death 7 

anything else to break down the mediseval and usher in the 
modern system of industry. The change was made possible 
for England by the active demand for her wool on the Conti- 
nent, especially after the Crusades in the thirteenth century, 
which did much to develop international trade. In exchange 
for wool, silver was imported, and this was coined and gradu- 
ally put into circulation in all parts of the country. Lords of 
manors did not oppose the change because it was clearly to 
their advantage to permit their villeins to substitute money 
payments for their labour dues, so long as they could hire 
labour as it was required, particularly in cases where their 
lands could be profitably converted into great sheep runs. 

The last attempt to perpetuate the old system was made The Blacl 
after the terrible epidemic known as the " Black Death " ®^ ^ 
(1348), which carried off from one-third to one-half of the 
population of the country. As a result of this frightful mor- 
tality labour became scarce and dear. Rather than pay the high 
money wages demanded, the lords of manors and the king 
united in the attempt to compel the villeins to make the same 
labour return in exchange for their allotments as under the old 
service system. " Statutes of Labourers " ordering workmen 
to accept the customary wages were passed in 1351, and subse- 
quent years, but they seem to have had little practical eftect. 
The Peasants' Revolt in 1381 seems to have been in part due 
to the bitter feeling engendered by these statutes, and though 
not immediately successful, it helped forward the transition 
from older conditions to newer ones which were more favour- 
able to labour. The onerous labour dues required of villeins 
had been so far given up by 1400 that the succeeding century 
has been styled " the golden age of the English labourer." 

The same cause which made possible the introduction of a Enclosure 
money economy stimulated another tendency that was on the 
whole advantageous, the enclosure of lands that had previously 
been allotted to villeins or held in common and their transfor- 
mation into great sheep ranches. The higher the price of wool 
the greater the profit to be reaped by the lord of the manor 
from converting his whole estate into a sheep run. When, by 
the Black Death, the dearness of labour was added to the deaf- 
ness of wool as an inducement in this direction, " enclosing " 



8' Rise of Modern Industry in England 

proceeded at a rapid rate, with the result that agricultural land 
came more and more to be private property as it is now under- 
stood in the United States. 
The New As a consequence of these changes, and others of subordinate 

System interest, English rural life had, by the beginning of the six- 

teenth century, assumed something of its modern character. 
The cultivators of the soil continued to produce for themselves 
most of the commodities they consumed, but no longer under a 
system of joint labour. They still raised about the same crops, 
but there was not the dull uniformity of the earlier period, and 
some improvement in methods had been made. In each agri- 
cultural district market towns had grown up to which farmers 
brought such of their products as were saleable and where they 
bought some of the commodities they could not produce advan- 
tageously for themselves. They paid money rents for their 
lands and if they worked for others received money wages as 
their compensation. 

The changes in the towns were as marked as those in the 
country. With the strengthening of the central government, 
the guilds, and especially the merchant guilds, were deprived of 
one of the chief objects of their existence, that is, the protec- 
tion of their members. Moreover, trade had become so much 
more extensive and important that the practice of giving asso- 
ciations with limited membership monopolies of its different 
branches was felt to be inexpedient. The loss of their 
monopoly privileges was fatal to the merchant guilds as indus- 
trial organisations, and those which continued in existence be- 
came mere social or religious clubs. 

The craft guilds survived for a longer period, but many of 
their functions also were assumed by the national government 
and the scope of their influence was narrowed. The immigra- 
tion of foreign artisans was also a circumstance tending to 
lessen their importance, though they did not relinquish their 
monopolies without vigorous and in some cases prolonged re- 
sistance. By 1600 the guilds had ceased to be the dominant in- 
fluence shaping town life. 
Contribtit- The most marked characteristic of the period which suc- 
mg Causes cggfjefj -^y^s national regulation of industry. This was ushered 
in by a series of events which can be only mentioned in passing. 



The National System 9 

The accession of Henry VII. to the throne in 1485 gave the 
country a strong ruler just at a ^ime when protracted civil war 
had prepared the people for sweeping changes. The central- 
ising policy which he inaugurated was continued by Henry 
Vni. and Elizabeth, neither of whom lost an opportunity to 
substitute national for local control and regulation. These 
changes were favoured by the invention of printing, which fos- 
tered the national literature, and by the discovery of America 
and of the ocean route to the Orient, which stimulated the 
national ambition. Henry VHI.'s quarrel with the Pope, on 
the subject of his divorce, severed the religious bond that at- 
tached England to the Continent. In becoming head of the 
Church as well as head of the State, Henry did much to exalt 
the importance of the crown in the eyes of his subjects. 
Through these influences national life was stimulated and! 
reliance on the general government increased. The result was^ 
the industrial organisation which for lack of a better name 
may be described as the " National System." 

§■ 6. The extent to which the general government under- The 
took to regulate industry in England in the time of the g j'i*'*^" 
Tudors is to-day hardly credible. We are so accustomed to 
the idea that the state should interfere as little as possible with 
business that the contrary system, in which regulation is relied 
upon usually and competition only under exceptional circum- 
stances, is difficult to imagine. And yet this was the condi- 
tion until comiparatively recent times in England and in most 
European countries. 

The practice of the Tudor sovereigns was not different in 
principle from that of their predecessors. Henry IH., for 
example, caused an " Assize of Bread and Ale " to be issued in 
1267, which prescribed standard weights for the farthing loaf 
of bread, varying with the price of wheat, and required 
municipal authorities throughout England to enforce the regu- 
lation. Even before this an " Assize of Cloth," issued in 1197 
by Richard I., had declared that all woollen cloth made in Eng- 
land should be twenty-four ells * in length, and had appointed 
inspectors or " aulnagers," to confiscate pieces falling below 
this standard. Eut the Tudors established and maintained for 
* An ell was forty-five inches. 



lo Rise of Modern Industry in England 

more than a century a strong central government and enforced, 

as had no earlier sovereigns, their national regulations. 
Debase- Henry VIII. 's arbitrary modifications of the monetary sys- 

the Coinaj^e ^em, made when he was hard pressed for revenue, illustrate a 
bad phase of national regulation. On two different occasions, 
under cover of effecting a recoinage of the worn and mutilated 
money of the country, he caused the silver coins in circulation 
to be withdrawn and put out in their place coins which not 
only were lighter in weight, but contained a smaller proportion 
of silver. Under his successor, Edward VI., this policy of 
debasement was carried so far that for a time the standard 
coin contained only one part of silver to three parts of alloy. 
A rriodern government might carry through such a policy once, 
but the attempt to repeat it three or four times within a few 
years would certainly precipitate a revolution. 
Statute of Under Elizabeth, governmental regulation took a happier 
tices turn. More politic than her father, she was never led by lack 

of revenue to disregard so completely the nation's interests. 
The most important piece of industrial legislation of her reign 
was the " Statute of Apprentices," enacted in 1563. This com- 
prehensive measure undertook to regulate the relations between 
masters and their journeymen and apprentices with the same 
minuteness that was characteristic of the guilds. " It made 
labour compulsory and imposed on justices of the peace the 
duty of meeting in each locality once a year to establish wages 
for each kind of industry. It required a seven-years' apprentice- 
ship for every person who should engage in any trade; estab- 
lished a working day of twelve hours in summer and during 
daylight in winter ; and enacted that all engagements, except 
those for piece work, should be by the year, with six months' 
notice of a close of the contract by either employer or 
employee. " "*■ Besides these general regulations it contained 
others of a more special character, the enforcement of which 
would have left very little scope to competition to determine 
any of the relations between workmen and their employers. 
; Another form of interference with industry very common 
during the reign of Elizabeth was the granting of monopolies. 
The most defensible were the great trading monopolies, such 
* Chejmey, Indzistrial and Social History of England, p. 156, 



The Mercantile System 1 1 

as the " East India Company," chartered in 1600, which had to 
incur very heavy expenses in estabHshing trade with distant 
lands and could hardly hope to recover the sums invested un- 
less protected by a monopoly, at least for a term of years. But 
other monopolies were granted with equal readiness. Among 
the articles whose production and sale were thus restricted to 
particular individuals towards the close of Elizabeth's reign 
were currants, salt, iron, powder, playing cards, calf-skins, 
hides, potash, vinegar, coal, steel, aqua vitse, brushes, bottles, 
saltpetre, lead, oil, glass, paper, starch, sulphur, and new 
drapery. Even the personal popularity of Elizabeth did not 
prevent an outbreak when this list was read in Parliament, and 
she was forced to promise to revoke some of the more ob- 
noxious grants. 

§ 7. Consistent with this treatment of industries carried The 
on in England was the policy towards foreign trade known as System 
the " Mercantile System," which was pushed to the greatest 
lengths during the seventeenth century. The central idea of 
this system was that the sure index of increasing national 
wealth is an increasing national supply of the precious metals. 
In harmony with this view it was held to be the essence of 
sound commercial policy to export commodities of high value 
and to import in return commodities of low value plus specie. 
The difference in value between commodity exports and im- 
ports was called " the balance of trade," and a balance on the 
side of exports was styled " favourable " because it was 
thought to entail an importation of gold or silver. 

One of the most obvious regulations dictated by mercantilist 
theory was the prohibition of the export of the precious metals. 
Such a regulation had been enacted in England as early as 
1381 and it was continued as regards English coin until so late 
a date as 181 6. To encourage the exportation of commodities, 
bounties were frequently paid, such as the famous corn bounty 
introduced during the reign of William III., in 1689, and 
continued until England ceased, even in years of abundant 
harvests, to be an exporter of the grains. To discourage im- 
ports — except gold and silver — a great variety of measures 
were resorted to, ranging all the way from low duties to abso- 
lute prohibitions. Discriminating duties on imports from 



12 Rise of Modern Industry in England 

certain countries, such as France, trade with which showed 
normally an unfavourable balance, were also common. Closely 
related to these trade regulations was the colonial policy ap- 
proved by the thought of the age. The mother country sought 
to limit the industries of her colonies to the production of raw 
materials and to monopolise the trade consisting in the impor- 
tation of these materials and the exportation to them of needed 
manufactured articles. 

Other examples of governmental interference might be given, 
but enough has been said to indicate how completely every 
department of industrial activity was subject to governmental 
regulation. The place of the local regulations which lost their 
force with the decline of the manorial and guild systems was 
largely filled by these new national regulations, and the field 
left to individual enterprise and competition was still very 
restricted. Only gradually did the conviction dawn in the 
minds of English statesman that free competition is, for many 
relations of industrial life, a more effective regulator than gov- 
ernment inspectors, backed though they be by the whole power 
of government police. This conviction did not bear fruit in a 
modification of national policy until after what has been styled 
the *' industrial revolution." 

"p^^ . 5 8. In 17^,0 England's industrial future was, to say the 

Industrial , , , ^ . ,^ ^^ . . , . ' , ,. . 

Revolution least, problematical. Her iron industry was m a declining 

state in consequence of the destruction of her forests, from 
which the charcoal, still used in smelting iron ore, was obtained. 
Coal mining was becoming more and more costly because of 
the difficulty of keeping the mines free from water. Manu- 
facturing still retained its etymological significance of " mak- 
ing by hand" (manu, facere), and England was little more 
favourably situated than other countries to develop textile and 
other manufactures by hand processes. In agriculture much 
progress had been iriade since the sixteenth century, but the 
smaliness of the country precluded any great development 
along agricultural lines. Finally, the country was on the eve 
of a great struggle with France to determine which should be 
the dominant power in America and India, and this struggle 
might well cause anxiet}^ in England, since France was larger 
in area and three times as large in population. In the light of 



Mechanical Inventions 13 

this situation no one would have ventured in 1750 to predict 
for England the marvellous growth which she w^as about to 
experience. 

The new factors which started the industrial revolution Mechanica 
before the end of the eighteenth century and made England "^®" ^^^^ 
for the greater part of the nineteenth the leading manufactur- 
ing country of the world, were inventions which brought about 
the substitution of power machinery for hand labour in many 
fields of industry and enabled England to utilise on a great 
scale her magnificent coal and iron resources. Of these the 
most important, although not the earliest, were James Watt's 
improvements in the steam engine. His single-acting pump- 
ing engine was patented in 1769 and his double-acting 
machinery-propelling engine in 1782. The first was applied,' 
to work a bellows in an iron foundry even before it was set 
up in 1777 to pump out a Cornish coal mine. In both con- 
nections it proved incomparably superior to the Newcomen 
engine which it superseded. The double-action engine was 
first employed to run a cotton mill in 1785, and that date marks 
the turning point in England's history as a manufacturing 
country. In its use to furnish a blast for smelting iron ore 
by means of bituminous coal the steam engine cheapened 
machinery; in its use to keep coal mines free from water it 
cheapened fuel ; finally, in its use to propel cheap machinery by 
the aid of cheap coal it enabled English manufacturers to under- 
sell all competitors in foreign markets. 

By itself the steam engine did not accomplish this result, Spinning 
since the machines which it was to propel had also to be in- 
vented. In 1750 both spinning and weaving were hand 
processes, and even before Watt was occupied with his 
engines other inventors had been busied with the question 
of substituting power machinery for hand labour in 
these industries. Tlie first improvements displaced the old- 
fashioned spinning wheel. In 1764, or thereabouts, a poor 
weaver by the name of James Hargreaves devised the " spin- 
ning jenny," or multiple spinning wheel. About the same time 
other inventors hit upon the idea of spinning by means of 
rollers. Richard Arkwright, a barber, made a commercial 
success of this process with his " water frame," patented in 



Weaving 



Steam 
Transpor- 
tation 



14 Rise of Modem Industry in England 

1769. In 1779 Samuel Crompton, another weaver, combined 
these new processes in his " spinning mule " and thereby gave 
to power spinning something of its present efficiency. 

Power weaving was perfected less rapidly. The Rev. 
Edmund Cartwright invented the first power loom in 1785, but 
it was not until after 1800 that it began to displace to any con- 
siderable extent the old weaving frame. About the same time 
that Cartwright made his invention, Henry Cort, an iron and 
steel manufacturer, devised the puddling process for trans- 
forming pig into malleable iron, and machinery for rolling the 
latter into bars of convenient size for further manufacture. By 
the end of the century the use of water and steam power in 
place of hand and foot power was beginning to make its way 
into every important branch of English manufacturing, and 
the latter term was coming to have its present meaning of 
" making by machinery." 

The industrial revolution was not fully consummated until 
the same power which had transformed manufacturing 
processes was applied to transportation. Robert Fulton's in- 
vention of a successful steamboat in 1807 was the first step in 
this direction. It was not, however, until 1838 that the first 
steamship crossed the Atlantic, and it is only in our own day 
that ocean freights are beginning to be moved predominantly 
by the power of steam. The invention of the locomotive by 
Robert Stephenson in 1814 made possible the application of 
steam power to land transportation. The first English railroad 
was opened for trafilic in 1825 and placed England more than 
a decade in advance of other European countries in her utilisa- 
tion of this important aid to industrial development. Cheap- 
ened means of transportation contributed quite as much as 
cheapened processes of manufacture to the marvellous growth 
of England's industries during the last century. They enabled 
her to ship her goods to the most remote quarters of the world 
and to import in exchange the cotton, wheat, and other raw 
materials for whose production she was less well adapted than 
for manufacturing. Thus these applications of steam power 
multiplied many fold the advantages which England derived 
from her abundant supplies of coal and iron and helped to con- 
firm her possession of the title of " mistress of the sea," which 



The Laissez-faire Policy 15 

she had acquired towards the close of the seventeenth cen- 
tury, 

§ 9. One of the principal effects of the industrial revo-iThe 
lution was a radical change in governmental policy in Eng- ^f^ire"^' 
land. As one invention followed another industrial conditions Police- 
were so modified that the old regulations ceased to be effectual. 
Specifications in regard to the qualities and the prices of goods 
were obviously inapplicable when methods and costs of produc- 
tion were changing so rapidly. Equally futile were rules in 
regard to periods of apprenticeship and rates of wages. 
Realisation of this fact came only gradually to members of Par- 
liament, and it was several years after Adam Smith formulated 
the arguments against governmental regulation and interfer- 
ence that have now become classic before the policy of non-inter- 
ference or laissez-faire was adopted. In his " Inquiry into the 
Nature and Causes of the Wealth of Nations," * published in 
1776, Adam Smith describes this policy as follows : " All sys- 
tems, either of preference or restraint . . . being taken away, 
the obvious and sim.ple system of natural liberty establishes 
itself of its own accord. Every man, as long as he does not 
violate the laws of justice, is left perfectly free to pursue his 
own interest in his own way, and to bring both his industry 
and capital into competition with those of any other man or 
order of men. . . According to tlie system of natural liberty, 
the sovereign has only three duties to attend to ; . . . first, the 
duty of protecting the society from the violence and invasion of 
other independent societies ; secondly, the duty of protecting, 
as far as possible, every member of the society from the injus- 
tice or oppression of ever}^ other member of it, or the duty of 
establishing an exact administration of justice; and, thirdly, the 
duty of erecting and maintaining certain public works and cer- 
tain public institutions, which it can never be for the advan- 
tage of any individual or small number of individuals to erect 
and maintain ; because the profit could never repay the expense 
to any individual or small number of individuals, though it 
may frequently do much more than repay it to a great society." 

The conversion of a majority of the members of Parliament Abolitic_ 
to belief in the laissez-faire policy in reference to wages, ap- °^ Restric 

♦End of Chapter IX., Book FV. 



i6 Rise of Modern Industry in England 

prenticeship, and the other matters regulated by the Eliza- 
bethan Statute of Apprentices occurred during the closing 
years of the struggle against Napoleon. In 1811 a Select Com- 
mittee of the House of Commons reported that "' no interfer- 
ence of the legislature with the freedom of trade, or vv^ith the 
perfect liberty of every individual to dispose of his time and his 
labour in the way and on the terms which he may judge most 
conducive to his own interest, can take place without violating 
general principles of the first importance to the prosperity and 
happiness of the community." Acting upon this view in 1813, 
Parliament responded to a petition demanding the enforcement 
of the clause of the Statute of Apprentices which required jus- 
tices of the peace to fix wages, by repealing that part of the 
law. Its attention was next directed to the apprenticeship 
clause of the Act, and in the following year, notv^^ithstanding 
the opposition of many workingmen, it also was repealed. 
Other legal restrictions were removed in subsequent years 
{e. g., the East India trade was made free in 1813; the restric- 
tions on emigration were abolished in 1824; restrictive features 
of the poor law were amended in 1834) and the way was pre- 
pared for the repeal of the tariff restrictions on foreign trade 
finally effected in 1846. With that measure the last vestige 
of the policy of national regulation devised by the statesman- 
: ship of Elizabeth and her successors disappeared. It would be 
a mistake to conclude, however, that the laissez-faire policy was 
ever, even for a few years, in full operation in England. As 
old regulations were abolished, humanitarian considerations 
secured the enactment of new ones designed less to further the 
interests of business than to protect the weaker classes in the 
community, children and women, from overwork under in- 
sanitary conditions. These new regulations, factory and work- 
shop laws, as they are called, have now assumed an importance 
which entitles them to separate consideration.* 
Rise of § 10. The substitution of expensive power machinery for 

System' ^^^ simple tools and implements previously used in all branches 
of industry ushered in the present " factory system." The 
leading characteristics of this system are so familiar that it will 
be necessary merely to indicate the changes which it made in 
* Cf. Chapter XXII.' 



Effects of Factory System 17 

the situation of the labouring- population of England. Previous 
to the industrial revolution it was customary for artisans to 
own their tools and to carry on their work either in their own 
homes or in small adjacent shops. The master workman was 
assisted by a few journeymen and apprentices, but in most 
trades there was no wide gulf between him and them. All be- 
longed to the same social class. The work done was more 
often to meet orders given in advance than to supply the gen- 
eral market, and consequently the risk of loss through mis- 
directed production was small. In some trades, and notably 
in the textile industry, a class of middlemen had arisen who 
supplied the raw material to artisans and paid them at stipu- 
lated rates for turning it into finished products. This arrange- 
ment relieved artisans of the trouble of seeking their own 
raw material and of dealing' directly with consumers, 
but it did not alter materially their relation to their work or to 
those who assisted them. Still another characteristic of the 
time was the practice of combining two or three occupations. 
The families of farm labourers usually had spinning" wheels, 
and added to the family income in winter by making yarn. 
Weavers' families, on the other hand, usuall}^ had garden 
patches about their homes, and produced for themselves in 
summer m^uch of the food which they required. In these wsijs 
the dependence of different families and of different localities 
upon single industries, which is so characteristic of the present 
organisation of industry, was lessened. 

The introduction of power machinery broke up these simple Effec^s < 
arrangements. To use such machinery economically it was gygt^nf 
necessary to employ dozens, even hundreds, of hands under the 
rame roof. Moreover, the mxachinery and the factory build- 
ing, in which it was installed, were too costly to be owned by 
the workers themselves. Their use brought forward a new 
class of " capitalist employers," who were widely separated 
from their employees, and were apt to look upon the latter very 
much as they looked upon the material instruments of produc- 
tion which thev employed. Finally, the new machine processes 
«f production called for different industrial qualities than those 
which had been at a premium when production was mostly by 
band. Tlie skill of the master craftsman was now matched 



i8 Rise of Modern Industry in England 

and even excelled by the quickness of the child who fed an 
automatic machine. As a consequence whole classes of the 
population, which were previously in comfortable circum- 
stances, were deprived of their ability to earn even a bare sub- 
sistence, and other classes, for whose labour there had been 
little demand, found their position much improved. A further 
result of the introduction of power machinery was a change in 
the location of industrial centres. From an early period the 
eastern and southern counties of England had been the seats 
of the country's principal industries. But both water power 
and coal were lacking in these regions while found in abund- 
ance in the northern and western counties. The result was a 
■ great shifting of industries to the latter. This shifting of the 
centres of industry imposed terrible hardships upon the sec- 
tions which were waning in industrial importance, from the 
consequences of which some of the counties of England have 
not even yet entirely recovered. 

The cheapened processes of production which were so ad- 
vantageous to the country as a whole, were, thus, the cause of 
much suffering to the working class. Their introduction served 
to widen the gulf between employers and employees, to make 
whole districts dependent for their prosperity upon the condi- 
tion of single trades, and to encourage the employment of chil- 
dren and women, for whose labour there had been little demand 
outside of the home in the previous age. The problems which 
have arisen as a consequence of these changes still press for a 
solution, not only in England, but in all progressive countries, 
and give perhaps its chief interest to the study of economics. 
Conclusion § H- To sum up this brief sketch of the rise of modern 
industry in England : the course of development was from local 
self-sufficiency in industrial matters and local regulation to an 
industrial organisation of national scope, in which questions of 
money and trade were prominent, and national regulation was 
the rule. Only within the last one hundred years has the sys- 
tem of industrial freedom been adopted. The institutions and 
practices belonging to this last stage of development, now so 
familiar as to seem unchanging, are none of them very old — 
compared with the age of industrial society — and are all of 
them on trial, and likely, in the course of time, to be found 



Conclusion 19 

unfitted to new industrial conditions, and to be discarded as 
were the institutions of the manorial system and the regulations 
of the Elizabethan period. Free competition, which seems to 
the modern mind so essential to the continuance of prosperous 
industrial activity, was almost unknown in mediaeval England- 
Private property, at least in agricultural land, hardly existed in 
its modern form. The granting of monopolies, which is so 
repugnant to the modern sense of justice, was almost as com- 
mon in the days of Elizabeth as is the incorporation of joint- 
stock companies to-day. Present practices and institutions have 
been adopted because they suit the needs of the time; but as 
surely as conditions are changing and new needs are becoming 
dominant, practices and institutions must also change. 

REFERENCES FOR COLLA TERAL READING 

* Ashley, English Economic History, 2 vols. ; *Ckeyney, Industrial and 
Social History of England, Chaps. I.-VHI.; Gihbzns, Industry in 
England; * Price, Short History of English Commerce and Indus- 
try; ^ar«<fr, Landmarks in English Industrial History; Rogers, 
Six Centuries of Work and Wages, and The Industrial and Com- 
mercial History of England; Cunningham, Growth of English 
Industry and Commerce, 2 vols. 



CHAPTER ir 



THE INDUSTRIAL EXPANSION OF THE UNITED STATES 



Colonial 
Period 



Liberty, 

Private 

Property, 

and 

Equalit}'- 



§ 12. The story of the settlement of different portions of 
North America by colonists from different lands, of the mag- 
nificent distances, and the differences in institutions and ideas 
which long held them apart, and of the common interests and 
the common cause, first against the French and Indians, and 
then against the English, which at last brought them together 
and cemented them into a nation under the Constitution of the 
United States, has been too often told to need repetition. From 
its very nature, as a new country with unbounded natural re- 
sources in virgin land and forests, the United States was pre- 
disposed to extractive industries. The earlier settlers estab- 
lished themselves along the coast as farmers and Indian traders. 
As the Indians were driven back into the wilderness, adven- 
turous whites took up the business of hunting and trapping, 
and acted as pioneers in the westward movement characteristic 
of the development of the country during the last century. 

During the seventeenth and eighteenth centuries, the Amer- 
ican farmer made for himself most of the things that he re- 
quired. His food was the produce of his farm or game from 
the neighbouring forest. For clothing he used the skins of 
animals and homespun cloth. His house was made of rough- 
hewn logs. Only his gun and some of his tools and implements 
were purchased, and these were mostl}'' imported from Eng- 
land. One important branch of manufacturing alone was de- 
veloped during colonial times, that is, ship-building, which 
early established itself in New England, and continued to be 
a leading industry in that section until v/ooden vessels were 
superseded by those of iron. 

The industrial institutions and ideas which were fostered by 
colonial conditions may be easily surmised. Living in com- 
parative isolation and enjoying almost complete industrial ia- 

20 



Liberty, Private Property, and Equality 21 

•dependence, the colonists came to regard liberty as one of their 
dearest possessions. To direct one's Hfe and activities as one 
pleased came to be thought of as an mherent right with which 
no such extraneous thing as government should interfere. The 
abundance of free land and the importance to the first settlers 
of extending the cultivated area as rapidly as possible so that 
the menace of Indian massacre might be pressed farther and 
farther into the interior, made the system of private property in 
land seem natural if not inevitable. From an early period 
settlers were permitted in nearly all of the colonies to acquire 
on easy terms the absolute ownership of large estates. As long 
as equally promising land remained open to the border pioneer 
there seemed nothing inconsistent in this policy with the ideal 
of equality, which was fostered by the simiilarity of the condi- 
tions under which most families lived and supported them- 
selves. This ideal showed itself in connection not only with 
social usages, but also with the political organisation of the 
country. Short terms and rotation in office, which are charac- 
teristic of American public life, have from the first been de- 
fended in the popular consciousness on the ground that any 
good American citizen is competent to serve his country in any 
capacity. 

Experience with the thefts and depredations of the lawless 
characters that are ahvays found in pioneer communities made 
the colonists peculiarly alive to the sacredness of property. It 
was taken for granted that property was justly acquired, and 
governmental machinery v/as largely devoted to protecting peo- 
ple in the use and enjoyment of their possessions. Thus, in the 
bills of rights which were generally appended to the constitu- 
tions adopted by the States after independence was achieved, 
life, liberty, and property are characterised as the three funda- 
mental and inalienable rights of American citizens. In exalt- 
ing the rights of property the colonists were not so much break- 
ing with the institutions which they had brought with them 
from the Old World as giving greater prominence to familiar 
ideals. By so doing they paved the way for an industrial civ- 
ilisation which has been marked thus far by intense individual- 
ism in thought and practice. 
: In conflict with the ideals of liberty and equality was the 



Slave vs. 

Free 

Labour 



Tlte 

National 
Incktstrial 
Ideal 



22 Industrial Expansion of the United States 

demand arising from the abundance of fertile land for a large 
labouring population. To satisfy this need Negro slavery was 
early introduced into the southern colonies, where conditions of 
soil and climate made slave labour profitable. The northern 
colonies resorted to the system of importing white servants 
from Europe under contracts (indentures) which required the 
latter to work for a certain number of years in return for their 
passage money. Where slavery flourished labour itself soon 
came to be despised by the free inhabitants, so that slaves, who 
were at first merely a convenience in such sections, became 
with the progress of time an economic necessity. The system 
of indentured labour had no such serious consequences. At 
first, a valuable supplement to the wages system which was 
carried on side by side with it in the northern colonies, it was 
given up entirely early in the nineteenth century, when easier 
ways were found of securing from Europe the much-needed 
working force. The diverse social, political, and economic ideals 
which North and South owed to their contrasting labour sys- 
tems were the root cause of the attempt of the Southern States 
to secede, and of the terrible Civil War through which the 
Union was saved and through which, incidentally, slavery was 
abolished. Since the issue of the Emancipation Proclamation 
in 1863 the wages system has been introduced in one form or 
another into all sections, until it has become the characteristic 
labour system of the whole country. 

§ 13. When the united colonies declared their independence 
of Great Britain and formed themselves into the United States, 
the industrial ideal of most of the revolutionists was an agri- 
cultural community. Appreciating the vast extent of the 
undeveloped resources of the country and the superior advan- 
tages of England for manufacturing, the founders of the Re- 
public counted upon a mutually advantageous trade, consisting 
of the exportation of raw products and the importation of man- 
ufactured goods, as one of the conditions to national prosperity. 
England's own policy had much influence in giving a different 
direction to national ambition. Through her restrictive meas- 
ures she made trade on equal terms between the two countries 
impossible. The result was that even before the Federal Con- 
stitution was adopted some of the states, such as Massachusetts 



The National Industrial Ideal 23 

and Pennsylvania, had entered vigorously on the policy of 
developing home manufactures. Through the influence of the 
representatives of these states the first national tariff act, passed 
in 1789, contained distinct intimations that the building up of 
manufactures vi^ithin the country was one of the objects aimed 
at. Alexander Hamilton's famous " Report on Manufactures," 
submitted to Congress in 1792, clearly presented and defended 
the ideal of national industrial independence, and when the 
United States was involved in 1806 in the European struggle, 
which had up to that time redounded to its advantage, was 
forced to ruin its own trade by the " Embargo Act," and, 
finally, in 1812, to take up arms against Great Britain in de- 
fence of its rights upon the high seas, this idea had gained 
many adherents. The tariff acts of 1816, 1824, and 1828 reflect 
clearly the new ambition to build up all desirable industries 
within the confines of the United States, and to reduce foreign 
trade from the position of the source of manufactured neces- 
sities to that of an outlet for surplus products. During the first 
three decades of the nineteenth century American cotton and 
woollen manufacturing was developed to a point where it 
compared not unfavourably with the same industries in Great 
Britain. The great inventions, which were described in the 
last chapter, were introduced, and in some cases improved 
upon, and the water-power furnished by the swift-flowing 
streams of New England and the Middle States was utilised. 
Iron and steel industries developed more slowly, owing to 
ignorance of the coal and iron resources of the country. Dur- 
ing this period the Southern States, which could not, because 
of their " peculiar institution," hope to develop manufactures 
of their own, quite reasonably objected to paying the higher 
prices needed to protect Northern manufacturers. Out of 
deference to the more important slavery issue, a compromise 
was effected in 1832 which resulted in lower protective duties 
until just before the outbreak of the Civil War. The with- 
drawal of the South from representation in the Federal Govern- 
ment during that struggle, and the thinly veiled hostility of 
some of the countries of Europe to the side of the North, 
caused a great revival of the ideal of national industrial inde- 
pendence. Opinions differ as to whether the protective tariffs 



24 Industrial Expansion of the United States 

and other measures that were adopted in the effort to realise 
this ideal have been beneficial to the country as a whole. That 
they have been potent influences in strengthening the bonds 
which united different sections, however, and in fostering a 
spirit of national as distinct from State patriotism, cannot be 
doubted. 
Physical § 14. The purchase of the Louisiana Territory from France 

istics^of the '^ ^^^3 g^ve a new direction to national ambition. Hence- 
United forth, to extend their settlements until they stretched from sea 
to sea, became the definite purpose of the people of the United 
States. The story of the way in which that purpose has been 
fulfilled constitutes the most characteristic chapter in the couti- 
try's history. 

As rounded out by the annexation of Texas in 1845 and the 
subsequent purchases from Mexico, the United States contains 
nearly 3,000,000 square miles of territory, of which full}'- 
2,500,000 square miles enjoy a summer climate suitable for 
agriculture. Geographically this region falls roughly into four 
great divisions. The original colonies were confined between 
the Atlantic Ocean and the Appalachian Mountains, which ex- 
tend with but few interruptions all the way from Maine to 
Georgia. West of these mountains the valleys of the Missis- 
sippi River and of the Great Lakes begin, and extend in an 
unbroken plain, embracing more than one-half of the area of 
the whole country, to the foot of the Rocky Mountains. From 
the Rocky Mountain range to the Sierra Nevada range in Cal- 
ifornia and the Cascade range in Oregon and Washington, is 
the third division of the country, an arid plateau broken by 
other mountain ranges and formerly designated as the Great 
American Desert. West of the Sierra Nevada and Cascade 
mountains, and extending to the Pacific Ocean, is the fourth 
geographical division. A brief account of the physical char- 
acteristics of these different sections will contribute to an un- 
derstanding of the forces which have shaped the industriat 
expansion of the country. 
The . The region between the Atlantic Ocean and the Appa- 

Seaboard lachian Mountains is distinguished by excellent harbours and 
numerous rivers and streams suitable for navigation and for 
use as sources of water-power. The land of this section is 



The Middle West 25 

fairly good and, in consequence of the growth here of many of 
the largest manufacturing and commercial cities of the coun- 
try, has been more highly cultivated than that of sections more 
distant from profitable markets. 

The Mississippi Valley and the Valley of the Great Lakes The Middle 
form the great agricultural section of the United States. Be- ^^ 
sides being very level, in consequence of glacial action at an 
earlier period, this region has a rich soil and is well watered 
by the clouds which rise off the Gulf of Mexico and are 
deflected east by the Rocky Mountains. Its natural advan- 
tages for water transportation are even more remarkable. It 
is estimated that the Mississippi and its tributaries, the Ohio 
and the Missouri, are navigable for over 10,000 miles of their 
extent, while for nearly half that distance they are large enough 
to carry vessels of a considerable size. The Great Lakes offer 
even better facilities for transportation, although over a shorter 
course. As supplemented by the canals connecting Lake 
Superior with Lake Huron and Lake Erie with the Hudson 
River and with Lake Ontario, these great bodies of water make 
possible continuous navigation for a distance of more than 
2000 miles. As outlets for the agricultural and mineral prod- 
ucts of the Northwest their importance can hardly be over- 
estimated. 

The western border of the Mississippi basin suffers from the 
same scarcity of rainfall that has given its name to the Great 
American Desert, and should really be treated with that section 
in an economic classification. This arid region is nearly looo 
miles wide at the northern border of the United States, but 
narrows to 500 miles on the Mexican frontier. Its total area 
is quite one-third that of the whole country. The soil of this 
vast territory has been found to be exceedingly fertile in those 
places where artificial irrigation can be employed, but even the 
most liberal estimates make such sections but a fractional part 
of the whole region. So far as can be foreseen the greater 
portion of it m.ust remain useful only for its mineral deposits 
and for cattle and sheep ranching. 

The country bordering on the Pacific Ocean has a character The Far 
peculiar to itself. Its southern section enjoys a semi-tropical ^^ 
climate and is suited to the cultivation of oranges, lemons, figs. 



26 Industrial Expansion of the United States 

and similar fruits, A lower mean temperature adapts the 
region farther to the north and extending all the way to Puget 
Sound, to the growth of wheat and other grains. Unfor- 
tunately this region is markedly deficient in harbours and nav- 
igable rivers, and for this reason, if for no other, is unlikely to 
attain as high a stage of industrial development as the Atlantic 
coast region. 
The New Detached from the compact area that has been described are 

the outlying territories more recently acquired by the United 
States by purchase, by annexation, and by conquest. Of these 
the principal are: Alaska (area, 531,000 square miles), Hawaii 
(6740 square miles), Puerto Rico (3600 square miles), and 
the Philippines (i20,ocx) square miles). Alaska is valuable for 
its mineral deposits and its fisheries. The principal product of 
Hawaii is sugar, for which there is a ready and ample market 
in the United States. Puerto Rico also produces sugar in con- 
siderable quantities, but its chief crops are coffee and tobacco. 
Both islands are sufficiently near the United States to become 
Americanised, and are valuable as coaling stations for the 
nation's growing fleet of merchant vessels. The chief products 
of the Philippines are hemp, sugar, copra, and tobacco. The 
first two are much needed in the United States, and may be- 
come the basis for an extensive trade. In addition, the islands 
are said to be richly supplied with minerals of different 
kinds. 
Develop- § 1 5- The foreign complications in which the country began 

Transporta- ^*^ ^^ involved shortly after the acquisition of Louisiana checked 
tion Facili- somewhat its internal development during the first two decades 
of the century. The long period of peace which ensued was 
very favourable to the progress of settlement, and about 1820 
the era of westward expansion began in good earnest. As 
already indicated, the first great obstacle to westward immi- 
gration was the Appalachian Mountains. Building roads over 
these mountains and through the dense forests which sur- 
rounded and covered them was a task of such seriousness that 
state aid had to be called in for its accomplishment. Even after 
roads were built, travel continued to be slow, difficult, and 
dangerous. The need of an easier route to the Middle West 
was keenly felt, and led to the projection of the Erie Canal to 



tie 



Growth of Railroads 27 

connect the Hudson River at Albany with the eastern end of 
Lake Erie. The canal was completed and opened for traffic in 
1825, and its superiority over the rough wagon roads as a 
means of conveying settlers and goods to and from the towns 
that were springing up about the Great Lakes and along the 
Ohio and Mississippi was immediately shown in the impetus 
which it gave to emigration from the Eastern States. 

While attention was being given to the building of better Growth o€ 
roads and of other canals in different sections of the country, 
the railroad and steam locomotive were introduced from Eng- 
land, the latter being used for the first time in 1829. This event 
marks a turning point in the history of internal improvements. 
In a few years there was in progress a veritable stampede for 
railroad construction at government expense. The States 
vied with each other to take the lead in this development, and 
Isonds to secure the needed funds were issued so recklessly that 
"by 1845 even so rich a commonwealth as Pennsylvania was 
brought to the verge of bankruptcy. The reaction which fol- 
lowed was as violent as had been the original mania. Canals 
and railroads were disposed of for a fraction of their cost and 
taxation was resorted to to m.ake up the deficit. The net result 
of the policy of internal improvements at State expense was: 
that the country secured the railroads indispensable to its de- 
velopment at an earlier period than would have been possible 
had conservative counsels ruled at this period. In comparison 
with the 229 miles of railroads built before 1832, there were in 
operation by 1840, 2818 miles; by 1850, 9021 miles, and by 
i860, 30,626 miles. Without the railroads the marvellously 
rapid settlement of the Mississippi Valley could hardly have 
taken place. 

Before the outbreak of the Civil War plans had been Crossing 
matured for the construction of a transcontinental railway, and ^ent ''"'*" 
appeal had been made for Federal aid to carry out the project. 
The idea was revived as soon as the war closed, and with the 
:aid of a Government loan and a substantial grant of land the 
Union and Central Pacific Railroads were finally connected. 
They were opened for through traffic in 1869, and served as a 
valuable aid to the settlement of the Far West. Other trans- 
continental lines were pushed over the Rocky Mountains at 



28 Industrial Expansion of the United States 

other points, and at the dose of the century there were sis 
different railroads crossing the country from east to west, 
and able to convey passengers from New York to San Frart- 
cisco in less time than had been required a hundred years 
earlier to go from New York to Washington. To aid in the 
building of these roads the Federal Government made land 
grants aggregating millions of acres and pledged its credit 
for millions of dollars, nor was their construction accom- 
plished without wholesale corruption and misappropriation of 
funds. It must be conceded, however, that in this case, as in the 
case of the state-aided railroads, the ultimate benefit to the 
material development of the country far exceeded the loss to 
the public purse. 
Increase in Already, by i86i, the railway mileage of the United States 
was equal to that attained in 1900 by any single European state. 
In the latter year the total mileage for the United States wa.5 
nearly 200,000 miles, as compared with only 176,000 miles for 
all European countries taken together. The increase in the 
business of the railroads in recent years has been even more 
remarkable than the increase in their mileage. In 1885 the 
number of passengers carried one mile by all of the roads of 
the country was in round numbers 9,000,000,000, and the num- 
ber of tons of freight carried one mile, 49,000,000,000.* In 
1895 the corresponding figures were 12,600,000,000 and 
88,600,000,000, indicating an increase in the ten years of about 
40 per cent, for passengers and 95 per cent, for freight. The 
increase from 1895 to 1901 was even more striking, the totals 
for the latter year being 17,000,000,000 passenger miles and 
147,000,000,000 ton-miles, representing a gain in the six years 
of 35 per cent, in passenger and 66 per cent, in freight traffic. 
When it is considered that it is good average hauling over a 
country road, for a man and a team to move twenty tons one 
mile in a day, some conception may be formed from these fig- 
ures of the importance of the service which the railroads of 
the country render. No single fact so well illustrates the rapid 
industrial expansion of the United States as this remarkable 
development of its transportation facilities. 

* These are the units usually employed to compare the businesses of 
different transportation systems. The first is called the " passenger 
mile," the second the " ton-mile." 



The Foreign and Native Born 



29 



§ 16. The following table shows the growth of population by Growth of 
decades from 1790 to 1900: Populatioc 







Increase, 


Year 


Population 


per cent. 


1790 


3,920,214 




1800 


5,308,483 


35-1 


1810 


7,239,881 


36.4 


1820 


9.638,453 


33-1 


1830 


12,866,020 


33-5 


1840 


17,069,453 


32.7 


1850 


23,191,876 


35-9 


i860 


31,443,321 


35.6 


1870 


38,558,371 


22.6 


1880 


50,155,783 


30.1 


1890 


62,622,250 


24.9 


1900 


75,568,686 


20.7 



These figures do not include the residents of the Indian Ter- 
ritory, nor the populations of Alaska, Hawaii, Puerto Rico, and 
the Philippines. The additions to be made under these heads 
for 1900 make the population of the whole country about 
85,000,000. 

In comparison with the rates at which the populations of 
other countries have grown during the period covered, the 
growth of the United States has been astonishing. In fact, 
history furnishes no parallel on an equal scale to the increase 
from 1790 to i860, when the total population doubled three 
times. The marked falling off in the percentage of increase 
since i860 is indirect proof that the chief incentive to the rapid 
growth of the preceding years was the abundance of fertile and 
practically free land which was open to settlement. It is also 
reassuring to those who feared lest the country should be bur- 
dened with a superabundant population. 

From the beginning of its history the United States has each The 

. . Foreign 

year attracted large accessions to its population from abroad, and Native 

From 1820, when statistics of immigration first began to be ^"^^ 
kept, to 1903, over 21,000,000 immigrants came to the country. 
The largest number in a single year previous to 1903 was 
789,000 in 1882. The number continued large, averaging about 
500,000 each year, until 1893, when it was reduced by the in- 
dustrial depression. The lowest number in recent years was 



30 Industrial Expansion of the United States 

reached in 1898, when only 229,000 immigrants were reported. 
By 1902 the number had increased again to 649,000, and in 
1903 it exceeded 850,000. No statistics of births and deaths 
for the country as a whole are collected, so it is impossible to 
compare directly the "natural increase," that is, the annual 
excess of births over deaths within the country, with the in- 
crease due to immigration. Some notion of the relative impor- 
tance of these two sources of population is afforded, however, 
by the census comparisons of the native and foreign born. The 
enumeration for 1900 showed that of the total population, 65,- 
800,000, or 86 per cent., were native born, and 10,500,000, or 
14 per cent., foreign born. During the decade from 1890 to 
1900 the native born increased 22 per cent., while the foreign 
born — owing to the marked falling off in immigration referred 
to — increased only 12 per cent. The census distinguishes also 
the native born of foreign parents. They aggregated in 1900, 
I 16,000,000, or 21 per cent, of the population. The native born 
I of foreign parentage and the foreign born taken together con- 
/ stituted in 1900 over one-third of the population of the country. 
Another element in the population which is of great sig- 
nificance is the Negro. In 1900 8,840,000 persons, or 12 per 
cent, of the people in the country, were coloured. This element 
increased from 1890 to 1900 18 per cent., while the ivhite popu- 
lation increased 21 per cent. 
The Distri- § 17. When the first census was taken in 1790, only 5 per 
the cent, of the population was found west of the Appalachian 

Population Mountains. In 1900 nearly 60 per cent, was so located. The 
progress of this westward expansion is indicated by the follow- 
ing statistics: From 1800 to 1850 the population of the North 
Atlantic States increased by 225 per cent., and that of the 
South Atlantic States by 105 per cent. In the same period the 
population of the North Central States increased from only 
51,000 to 5,400,000, and that of the South Central from only 
335,000 to 4,300,000. In the later years of this period the set- 
tlement of the Far West was just beginning through the migra- 
tion of gold seekers to California. From 1850 to 1900 the popu- 
lation of these sections increased as follows : North Atlantic 
States, 144 per cent. ; South Atlantic States, 123 per cent. ; 
North Central States, 387 per cent. ; South Central States, 227 



The Foreign Born 31 

per cent.; Western States, from only 179,000 to 4,100,000. 
The decennial rates of increase for these different sections since 
1850 are significant : 

Percentages of Increase of Population 





1850-1860 


1S60-1870 


1870-1880 


iSSo-iSqo 


iSgo-igoo 


North Atlantic States, 


23 


16 


18 


20 


21 


South Atlantic States, 


15 


9 


30 


17 


18 


North Central States, 


68 


43 


34 


29 


18 


South Central States, 


34 


II 


39 


23 


25 


Western States, 


246 


60 


78 


71 


33 



These figures show a gradual equalisation in the rates of 
growth of different sections. It may fairly be concluded from 
them that the westward movement of population has about 
come to an end, and that but for peculiar local conditions 
the Eastern States are likely in future to grow as rapidly as the 
states west of the Mississippi. 

The distribution of the Negro and foreign-born elements in The 
the United States has given rise to special problems for the sec- ^Z"^^^^ 
tions most affected. Not more than one-tenth of the Negro 
population has withdrawn from the states where slavery flour- 
ished before the Civil War. In 1900, in six of these states — 
Mississippi, South Carolina, Louisiana, Georgia, Alabama, and 
Florida — Negroes constituted over 40 per cent, of the popula- 
tion. In all of them the race problem overshadows all others. 

The immigrants who came to the United States settled Foreign 
for the most part in the North and West. In 1900 over 86 per B°™ 
cent, of the total number were living in the North Atlantic and 
North Central States, and only 8 per cent, in the Western 
States. The states in which the foreign-born constituted over 
25 per cent, of the population in 1900 were : North Dakota, 
Rhode Island, Massachusetts, Minnesota, Montana, Connecti- 
cut, and New York. If to the foreign bom found in these 
states be added the native born of foreign parentage, the for- 
eign element is even rnore conspicuous. Thus, in 1900, persons, 
one or more of whose parents were foreign born, constituted in 
North Dakota, '^y per cent, of the population ; in Minnesota, 75 
per cent.; in Wisconsin, 71 per cent.; in Rhode Island, 64 per 
cent.; in Massachusetts, 62 per cent.; in New York, 59 per 



Concentra- 
tion of 
Population 
in Cities 



Agricultur- 
al Develop- 
ment of the 

United 
States 



32 Industrial Expansion of the United States 

cent., and in California, 55 per cent. It goes without saying 
that special measures are needed in these states to protect 
American ideals and American institutions from foreign influ- 
ences. 

Next to the westward movement, the concentration of popu- 
lation in cities was the most striking tendency of the last cen- 
tury. In 1800 only 4 per cent, of the people of the country 
lived in cities of 8000 inhabitants and upwards. This propor- 
tion had increased to 12 per cent, in 1850. Since then the 
growth of cities has been so rapid that they contained in 1900 
one-third of the total population of the country. A compli- 
cating aspect of this growth of cities has been the large 
foreign element which most of them contain. According 
to the census of 1900 the 161 principal cities of the country, 
which contained 26 per cent, of the total population, included 
49 per cent, of the foreign born. In 86 of these cities tlie for- 
eign born constituted more than one-fifth of the total popula- 
tion, in 24 of them more than one-tliird, and in 9 more than 
two-fifths. This large foreign element in American munici- 
palities has added its share to the economic and political diffi- 
culties with which these rapidly growing centres of population 
have had to contend. 

§ 18. Agriculture remains to-day, as it was in the colonial 
period, the dominant industry of the United States, This has 
been the natural result of the extensive area of fertile land with 
which the country is endowed, and its still relatively sparse 
population. Of its principal agricultural products, three, corn, 
white potatoes, and tobacco, were indigenous to the New 
World. The first, because of the ease with which it may be 
grown on new land, has contributed more than any other 
plant to the material development of the country. In colonial 
days, corn, hay, wheat, and potatoes were leading crops in 
the North ; corn, tobacco, rice, and indigo in the South. With 
the invention of the cotton gin, a machine for separating 
the cotton seed from the cotton fibre devised by Eli Whitney 
in 1794, and of spinning machinery capable of treating the 
short-fibred variety of cotton which alone flourished on the 
mainland, that product began to be, as it has ever since re^ 
mained, " king " in the Southern States ; but com, hay^ 



Recent Changes 33 

■'ivheat, and potatoes continued to be the staples of the North. 
As cities arose truck and dairy farming to supply their needs 
became profitable. Meantime the pressing back of the Indians 
encouraged the keeping of stock, since this is practicable only 
in localities where property can be protected. Agricultural 
methods, both North and South, prior to the Civil War, were 
exhausting to the soil, and the wearing out of old lands was a 
strong incentive urging settlers to bring the superior soils of 
the Mississippi Valley under cultivation. 

The cheapness of land and the dearness of labour have been Invent! 
conditions favourable to the invention and use of labour-saving ^^ ^^^ 
tools and machines. American farmers were from the first ments 
progressive. They were forced to devise methods better 
adapted to the conditions of a new country than those they 
brought with them from Europe. The invention of agricul- 
tural machinery was especially stimulated during the Civil War, 
when the labour supply became even less adequate than before 
to the needs of the country. In this period many of the inven- 
tions were patented which have made American agriculture so 
different from that of the Old World. Tlie tendency of these 
improvements has been to increase the productiveness of 
American farming not so much for each acre cultivated as for 
each man engaged in cultivation. Only recently has attention 
begun to be given on any large scale to the problem of getting 
as much as possible out of each acre of land, because only re- 
cently has lack of land been felt as a serious hardship by the 
ambitious American farmer. 

Since the close of the Civil War wheat cultivation has had a Recent 
gteat development in the Northwest ; the " corn belt " has been " 

extended west of the Mississippi to the very borders of the arid 
region, and in that region itself cattle, horse, and sheep grazing 
liave become important industries. The extension of the " cot- 
ton belt " to include eastern Texas, and the rapid growth of 
the fruit industry in Florida and California are other changes 
of comparatively recent date. Meantime agriculture in the 
more settled portions of the country has becomiC diversified and 
rotations of crops, calculated to preserve the fertile properties 
of the soil, have been introduced. The raising of small fruits 
and the keeping of cows, whose milk is sold in the city market, 



34 Industrial Expansion of the United States 

or converted into butter and cheese, are now chief interests to 

Eastern farmers. The present distribution of agricultural 

products in the United States is roughly indicated by the 

accompanying map. 

Principal § 19. Among all of the products of the country corn still 

al'^Products ^olds first place. Its relative importance in comparison with 

of the Unit- other agricultural staples is shown by the following table, based 

on statistics published by the United States Department of 

Agriculture : 





Average Annual 


Average Annual Pi 




Crop 


of Total Crop 




1896-iqoo 


1896-1900 


Com, 


. 2,058,850,000 bu. 


$585,000,000 


Hay, 


58,600,000 tons 


409,000,000 


Wheat, . 


540,500,000 bu. 


355,000,000 


Cotton, . 


9,040,000 bales 


313,000,000 


Oats, 


748,460,000 bu. 


174,700,000 


Potatoes, . 


209,650,000 bu. 


84,300,000 



Corn As the map indicates, the principal corn-producing states 

constitute a compact area, the " corn belt." In 1896 seven of 
these states — Iowa, Nebraska, Illinois, Kansas, Missouri, In- 
diana, and Ohio — produced more than two-thirds of the coun- 
try's crop. Since that year the agriculture of these states has 
become more diversified, and corn-growing has progressed 
in other sections, but they still produce more than one-half of 
the total crop, and depend in large measure upon it for their 
prosperity. 

Hay Hay, the second crop in importance, is produced in every 

part of the United States, and cannot be said to be localised in 
any particular region. The same is true of potatoes, and, in 
less degree, of oats. 

Wheat The production of v/heat is also widespread, but the states 

of the Northwest, Minnesota and the Dakotas, are so depend- 
ent on this crop that they are usually described as the " wheat 
belt." The average annual crops of the years 1896 to 1900 indi- 
cate the following order for the leading wheat-producing 
States of the country: Minnesota (61,000,000 bu.), Kansas 
(53,000,000 bu.), North Dakota (36,000,000 bu.), California 
(30,000,000 bu.), Ohio (30,000,000 bu.), South Dakota (30/ 



127 



MAP OF THE I 

Showing approximately tbe Productive Areas oi 

lis 111 107 103 iia 
















Mr 




JITED STATES 

incipal Agricultural and other Staples, 1901. 




E.P.Fisk. EiiKT.. N.T. 



U. S. Bureau oj Statistics. 



Development of Mining Industries. 35 

000,000 bu.). Together these six states produced in these 
years nearly one-half of the country's crop. 

Cotton is more rigidly confined to a particular region than Cotton 
any other important agricultural product. Practically the en- 
tire crop of the country is raised in the seven states, South 
Carolina, Georgia, Alabama, Mississippi, Louisiana, Arkansas, 
and Texas. In all of them it is the important money crop of 
most localities, and prosperity ebbs and flows according to the 
size of the crop and the price. The average annual production 
in bales of 500 pounds of these states from 1895 to 1899 was 
as follows: Texas, 2,500,000; Georgia, 1,400,000; Mississippi, 
1,200,000; Alabama, 960,000; South Carolina, 920,000; Ar- 
kansas, 730,000, and Louisiana, 660,000. A comparison of the 
cotton crops of recent years indicates that the centre of produc- 
tion moved westward down to about 1900, when there was for 
the first time a smaller increase in the Texan crop than in the 
crops of the other cotton states. 

Although the aggregate amounts of the three great staples, 
corn, wheat, and cotton, produced in the United States, have 
shown no tendency to diminish, they have not increased in 
recent years as rapidly as have the 'products of minor branches 
of agriculture ; nor has agriculture as a v^rhole developed at the 
same rate as mining, manufacturing, and transportation. If 
the present trend of development continues, it will not be long 
before agriculture has surrendered its place as the country's 
dominant industry in favour of manufacturing. 

§ 20. During the seventeenth century iron mining developed Develop- 
in a small way in New Jersey and at other points where beds ^f^^^^^ 
of ore were discovered. The cheapness of charcoal enabled Industries 
the Colonies to produce iron, not only for themselves, but for 
export, until the cheaper process of smelting by means of bitu- 
minous coal was invented. The Champlain ore district was 
discovered in 1801, and within a few years developed into the 
chief seat of the iron industry. Notwithstanding the protec- 
tive duty, charcoal iron competed at an increasing disadvan- 
tage with the imported bituminous product and the industry 
languished until 1839, when the problem of smelting ore by 
means of the anthracite coal that had been discovered in Penn- 
sylvania was successfully solved. From this time on progress 



36 Industrial Expansion of the United States 

in the iron industry was rapid. In 1844 T-shaped rails were 
first rolled in the United States, and in the same year iron ore 
was discovered on the shores of Lake Superior. In 1855 the 
output of anthracite pig iron exceeded for the first time that 
made from charcoal. The same 3'^ear saw the invention in Eng- 
land of the Bessemer process, introduced nine years later in 
the United States, and the beginning of that wonderful devel- 
opment which was to transform the iron age into the age of 
steel. The exploitation of the iron mines on Lake Superior 
proceeded slowly until after the close of the Civil War. It was 
not until 1869 that the output of bituminous coal and coke iron 
exceeded that made with charcoal, and not until 1875 that it 
exceeded that made with anthracite coal, or that the seat of 
the iron industry was definitely transferred from eastern to 
western Pennsylvania. Progress in the iron and related in- 
dustries was very rapid after 1880, as is shown by the following 
statistics of iron, steel, and coal production : 

Quantities of Iron, Sfeel, and Coal Produced in the 

United States from 1880 to igoo 

{In tons of 2240 pounds) 

Pig Iron Steel Anthracite Coal Bituminous Coal 

1880, 3,800,000 1,200,000 28,600,000 38,200,000 

1890, 9,200,000 4,300,000 41,500,000 99,400,000 

1900, 13,800,000 10,200,000 51,300,000 189,700,000 

Iron I" 1890 the United States surpassed Great Britain for the 

and Coal first time as a producer of pig iron, as she had as a producer of 
iron ore twelve years earlier. In 1899 the United States be- 
came also the leading coal-producing country of the world. 
According to a reliable estimate the United States produced in 
1900 34 per cent, of the world's output of pig iron and 2)7 per 
cent, of its output of steel. 

Practically the entire output of anthracite coal is mined in 
northeastern Pennsylvania. That state also leads in the pro- 
duction of bituminous coal, being credited in 1900 with 71,000,- 
000 tons, or nearly one-half of the total output for the country, 
in comparison with 23,000,000 tons for Illinois, 20,000,000 tons 
for West Virginia, and 17,000,000 tons for Ohio. Nearly five- 
sixths of the bituminous coal produced in the country is mined 
east of the Mississippi. 



Gold, Silver, and Copper 37 

The chief source of iron ore continues to be the iron ranges 
adjacent to Lake Superior in Michigan, Wisconsin, and Min- 
rjesota. Together these states produced in 1900 19,000,000 
tons, or more than two-thirds of the country's total output. 
Other large producers were Alabama, Pennsylvania, and West 
Virginia. More than five-sixths of the iron ore supply of the 
country is drawn from states east of the Mississippi. 

Next in importance to coal and iron among the mineral prod- Gold 
ucts of the United States are the metals, copper, gold, silver, 
lead, and zinc, and the commodities allied to coal, petroleum 
and natural gas. The country's output of gold was insig- 
nificant until that metal was discovered in California in 1848. 
According to the statistics given by the United States Mint, the 
production of 1853 exceeded 3,000,000 fine ounces. It did not 
again attain that amount until 1898, when Colorado, with an 
output of over i, 000,000 ounces, had become the leading cen- 
tre of production, and California, Alaska, South Dakota. Mon- 
tana, Arizona, and Utah were each contributing from 100,000 
to 750,000 ounces annually to the country's total. 

The silver resources of the United States did not begin to be Silver 
imcovered before i860, when some rich deposits were dis- 
covered in Colorado. The maximum output v/as attained in 
1892, when 63,000,000 fine ounces were produced. Since that 
year there has been some decline in the industry in consequence 
of the great fall in the gold price of the metal. The leading 
silver-producing states in 1900 were Colorado, which produced 
more than one-third of the total output, Montana, which con- 
tributed about one-fourth, Utah, which contributed more than 
one-seventh, and Idaho, which contributed about one-ninth. 

The development of the copper industry of the country has Copper 
proceeded slowly, although that metal now stands next to iron 
among America's mineral products. The copper mines on 
Lake Superior in Michigan, formerly worked by the Indians, 
began production in a small way in 1854. For nearly a gen- 
eration these mines were the principal sources of supply, and 
it was deemed necessary to protect the infant industry with a 
dut}' on imported copper. In the early eighties the copper re- 
sources of Montana were discovered, and by 1890 that state 
had taken the lead as a copper producer.* Next to Montana 



Petroleum 



Mineral 

Prodticts, 

igoo 



38 Industrial Expansion of the United States 

and Michigan in copper production stand Arizona, Colorado^ 
and California. The progress of copper production has been 
continuous since the close of the Civil War. The output in 
1870 was estimated at 12,600 tons. By 1880 it had increased to 
27,000 tons; by 1890 to 116,000 tons, and by 1900 to 271,000 
tons. The United States now produces more copper than all 
the rest of the world put together. 

The production of petroleum dates from about i860. It was 
first discovered in western Pennsylvania, and wells have since 
been bored in Ohio, Indiana, New York, West Virginia, Col- 
orado, California, Texas, and other states. In 1877 the total 
output of the country amounted to 560,000,000 gallons. Prog- 
ress since that year has been steady, and in 1900 the total out- 
put amounted to 2,660,000,000 gallons, of which 44 per cent, 
was exported. 

The production of natural gas was begun in 1872, also 
in western Pennsylvania. Pennsylvania, Ohio, and New 
York are still the principal sources of supply. The value 
of the natural gas output increased from $13,000,000 in 
1895 to $23,600,000 in 1900, but there are indications that the 
industry must be short-lived. 

The following table indicates the relative importance of the 
leading mineral products of the United States in 1900: 



Quantities and Values of Mineral Products 
United States in igoo 

Coal: Bituminous (short tons), 

Anthracite (long tons^ 
Pig Iron (long tons), 
Copper (pounds), . 
Gold (troy ounces), 
Petroleum (barrels). 
Silver (tro}' ounces), 
Natural Gas, 
Lead (short tons) . 
Zinc (short tons), . 



of the 



Quantity 


Value 


212,500,000 


$221,000,000 


51,000,000 


85,750,000 


13,800,000 


260,000,000 


606,000,000 


98,000,000 


3,800,000 


79,000,000 


63,000,000 


75,750,000 


74,500,000 


35,750,000 




23,600,000 


271,000 


23,500,000 


124,000 


10,600,000 



In that year the United States led all countries in the produc- 
tion of coal, iron, copper, gold, silver, and lead. Its primacy in 
the production of the precious metals is closely contested, as- 



Manufacturing Industries 39 

regards gold by British South Africa and Australia, and as re- 
gards silver by Mexico. In all the other products, however, its 
ascendency promises to increase rather than to diminish with 
the progress of time. Its greater area should enable it to pro- 
duce more of some of these minerals than other countries, but 
its ability to produce more of all of them is a striking evidence 
of the wealth of its natural resources. 

§21. The developm.ent of manufacturing in the United Develop- 
_ , , r 1 • 1 • 1 11 ment of 

States has been part of a general movement m which all pro- Manufac- 

gressive countries have shared, consisting in the introduction turing 

. , . . , , 1,1 r 1 Industries 

of machmery to perform tasks that could not be performed at 

all or not nearly so cheaply by hand labour. The resulting " in- 
dustrial revolution " began to be felt in America during the 
first decade of the nineteenth century, and has since spread 
until it has affected industrial methods in the New even more 
than in the Old World. 

The mechanical inventions of the nineteenth century, some 
of which have already been described, completed the industrial 
revolution begun in the eighteenth, by causing machinery to 
take the place of hand labour in nearly every branch of indus- 
try. Most important were inventions connected with the gen- 
eration and utilisation of electrical power. The telegraph, the 
telephone, the dynamo, the electric light, and the electric car 
are a few of the inventions which promise to make the 
twentieth century the age of electricity as the nineteenth was 
the age of steam. Up to the present time the generation of 
electricity has required steam or water power. It has been, 
therefore, a secondary rather than a primary motor, and im- 
portant because of the ease with which it can be transmitted 
great distances and applied in just the amount needed for each 
operation. By means of electricity sources of power, such as 
the Falls of Niagara, which were too great to be applied directly 
to the rotation of m^achinery, have been turned to a variety of 
uses. The power of Niagara now not only propels the 
machinery of numerous manufacturing establishments, but fur- 
nishes electric lights and force to run electric cars to towns 
within a radius of twenty miles. In the West water power 
is now used to generate electricity to aid in mining operations 
at distances of sixty-five miles and upwards. 



40 Industrial Expansion of the United States 

The manufacturing progress of the United States is roughly 
indicated by the figures in the following table, based oa 
the census returns : 

Statistics of Manufactures in the United States, 18^0 to igoo. 





Number of Es- 




Total 


Total 


Value of 




tablishments 




Capital 


(Average) 


Products 




Reporting 






Wage-earners 




1850, 


123,025 


$ 


533,000,000 


957,000 


$1,019,000,000 


i860, 


140,433 


I 


,010,000,000 


1,311,000 


1,886,000,000 


1870, 


252,148 


2 


,118,000,000 


2,054,000 


4,232,000,000 


1880, 


253,852 


2, 


,790,000,000 


2,733,000 


5,370,000,000 


1890, 


355-405 


6, 


,525,000,000 


4,252,000 


9.372,000,000 


3900, 


512,276 


9 


.831,000,000 


5,315,000 


13,010,000,000 



A striking fact revealed by these statistics is that while the 
number of establishments and of wage-earners increased five- 
fold or less during the period, the value of products increased 
thirteen-fold, and the amount of capital nineteen-fold. This 
affords indirect support to the statement that the country's 
progress in manufacturing has been for the most part progress 
in machine production. A more accurate notion of the growtli 
of manufactures is to be obtained by studying the facts in refer- 
ence to particular branches of industry. 
Manufac- Xhe principal change that has taken place in the iron and 

Iron and steel industry is a substitution on a large scale of steel for iron 
Steel products. Thus in 1880 less than one-third of the 3,800,000 

tons of pig iron produced in the United States was converted 
into steel; in 1900 about four-fifths of the 13,790,000 tons pro- 
duced was so converted. As late as 1878 more iron than steel 
rails were produced in the country ; at present iron rails have 
practically gone out of use, as but a few thousand tons con- 
tinue to be rolled each year in comparison with two to three 
million tons of rails of steel. Another change is in the process 
by which steel is made. Improvements in the open-hearth 
process invented by Siemens in 1867 have caused it to gain in. 
favour in comparison with the Bessemer process. The follow™ 
ing table illustrates this development : 



All Other 


Total 


75,000 


4,278,000 


69,000 


6,116,000 


105,000 


10,183,000 



Manufactures of Cotton 41 

Statisit'cs of Crude Steel Produced m the United States 
(lo7ig tons) 
Open-hearth 
Bessemer Steel Steel 

1890, 3,690,000 513,000 

J895, 4,910,000 1,137,000 

1900, 6,680,000 3,398,000 

The larger production of open-hearth steel is significant be- 
cause it indicates a utilisation of ores which could not be eco- 
nomically treated by the Bessemer process. 

Comparing the growth of iron and steel manufacturing in 
the United States with its growth in other countries, it appears 
that Germany alone has experienced a similar development. 
The latter country now contests with Great Britain for the 
position of second largest iron-producing country in the 
world. In 1902 the United States produced more iron and 
steel than both of these countries together, while either one of 
them produced four times as much as any other single country. 

The progress of the United States in iron and steel manu- Manufac 
facturing has contributed greatly to its progress in other lines ^^^^^ "'" 
by cheapening machinery, but in no other has so favourable 
a showing been made. More typical of the general manufactur- 
ing development of the country is the growth of the cotton in- 
dustry, a department in which the United States is still inferior 
to Great Britain. The average annual consumption of cotton 
in the United States in the six years 1873- 1878 was 1,180,000 
bales, as compared with an average world consumption of 
5,490,000. In the years from 1891 to 1896 the average annual 
consumption in the United States had increased to 2,570,000 
bales, but the world consumption in the same period had in- 
creased to 10,500,000 bales. The gain in the consumption 
by the United States was thus from 21 to 24 per cent, of 
the total. In the year 1900 the United States consumed 
29 per cent, of the world's total. The same story is told 
by a reference to the number of spindles in American mills 
at different periods. The census for i860 gave the total 
at 5,000,000. By 1880 the number had doubled. In 1890 it 
was returned as 14,000,000 and in 1900 as 19,000,000. In 
interpreting these figures it must not be forgotten that there is 
a high protective tariff on cotton goods which prevents the 



Concentra- 
tion m 
Manufac- 
turing; 



The De- 
velopment 
of Foreign 
Trade 



42 Industrial Expansion of the United States 

foreign manufacturer from competing on equal terms in the 
American market. 

It v/ould require too much space to describe in detail the 
growth of other branches of manufacturing. In every line in 
which machinery can be largely used the United States has 
made notable progress, with the general result that the country 
now depends less upon Europe than at any previous period for 
the manufactured goods that she requires and that her own 
manufactured products are coming to take a very important 
place among her exports. With the increased use of machin- 
er}' in manufacturing has come a tendency towards con-' 
centration of management and resulting enlargement of the' 
size of the business unit. The latest phase of this develop- 
ment is the so-called " trust." Competing firms have been 
combined into great corporations, which in some cases have' 
gained a virtual monopoly, at least for a time, of the branches' 
of manufacturing with which they are concerned. The prob-' 
lems which have arisen in connection with this movement are 
discussed in Chapter XXV. 

§ 22. The growth of the foreign trade of the United States 
has been less striking than the development of home industries, 
partly because of the protective tariff which has restricted the 
importation of protected articles. The following table brings' 
out the main facts in reference to the country's foreign trade" 
since 1855 : 

Foreign Commerce of the United States, iS^s ^^ ^9^'^ 

Percentagfe 











Increase or 




Imports 


Exports 


Total 


Decrease* 


1855 


$258,000,000 


$219,000,000 


$477,000,000 




i860 


354,000,000 


334,000,000 


638,000,000 


+46 


1865 


239,000,000 


166,000,000 


405,000,000 


-70 


1870 


436,000,000 


393,000,000 


829,000,000 


+105 


1875 


533,000,000 


513,000,000 


1,046,000,000 


-f26 


1880 


668,000,000 


836,000,000 


1,504,000,000 


+44 


1885 


578,000,000 


742,000,000 


1,320,000,000 


— 12 


1890 


789,000,000 


858,000,000 


1,647,000,000 


+25 


1895 


732,000,000 


808,000,000 


1,540,000,000 


-6 


1900 


850,000,000 


1,394,000,000 


2,244,000,000 


+46 



Down to 1874 the value of imports regularly exceeded the' 

■* -(- increase, — decrease. 



Changes in Exports 43 

value of exports, chiefly because during that period foreign 
capital in the form of machinery, etc., was being imported, 
with which to develop the internal resources of the country. 
The excess of exports which has characterised the trade in 
every year except three since 1874 indicates an increasing re- 
liance on home capital and the partial repayment of the foreign 
capital invested here during the earlier period. The table 
reveals also the violent fluctuations to which foreign trade is 
subject. 

During the last twenty years the character of the country's Changes 
export trade has changed somewhat, as is shown by the follow- 
ing table : 

Percentages of Total Exports of Different Kinds of Products, 







1880 to 


/goo 






1880, 


Agriculture 
83 


Mining 

I 




Forest 
2 


Manafactures 
12 


1890, 


74 


3 




3 


18 


1900, 


61 


3 




4 


32 



The growth of export trade in manufactured products indi- 
cated justifies the belief that the United States is passing the 
, period when her manufacturing industries as a whole require 
protection. That they are still protected by high tariff duties, 
Jiowever, must not be lost sight of in interpreting the facts 
shown, or the other fact, of which much has been made in 
recent discussions, that exports now exceed imports of manu- 
factured products. This would certainly not be the case if the 
protective tariff were repealed. 

In comparison with European countries, and notably with 
Great Britain, the foreign trade of the United States is small 
in proportion to her population and wealth. The reason for 
this is that the United States is itself adapted to the produc- 
tion of such a variety of products that different sections secure 
by means of internal trade most of the things which they re- 
quire. No European country could afford to dispense with 
foreign products, since to do so would entail suffering upon 
whole classes of the population who would thereby be deprived 
of the very necessaries of life. It would entail hardship on the 
people of the United States also if foreign trade were inter- 



•Summary 



H^ooclttsion 



44 Industrial Expansion of the United States 

rupted, but the articles that would be missed would not be abso- 
lute necessaries, but comforts such as coffee, sugar, tea, and 
tropical fruits. The United States is more nearly industrially 
independent than any other important country in the world 
unless it be China, whose independence is due more to the low 
standards of living of her people than to the abundance of her 
natural resources. 

§ 23. In the preceding sections the principal facts in regard 
to the industrial expansion of the United States have been 
passed in review. The circumstances which favoured the estab- 
lishment of the fundamental legal institutions, freedom of con- 
tract and private property, were discussed, and their incon- 
sistency with the other institution, slavery, which was swept 
away by the Civil War, alluded to. There followed a descrip- 
tion of the physical characteristics of the North American 
Continent and a sketch of the progress of the principal 
branches of industry, transportation, agriculture, mining, 
manufacturing, and foreign trade, with incidental reference to 
the standing of the United States among the nations of the 
world in these different branches of production. 

The point most deserving of emphasis in this account is the 
debt which the country has owed at every stage of its progress 
to its natural resources. These have played an important part 
in developing in the typical American the restless energy^ 
enterprise, and mechanical ingenuity by which he is distin- 
guished. At the same time they have offered an almost bound- 
less field for the exercise of these qualities and have so richly 
rewarded effort that the standard of comfort and general well- 
being in the United States has been higher than in any other 
country of the world at all comparable with it in area. If the 
United States stood first among the nations of the world in the 
year 1900 in the production of corn, wheat, cotton, coal, iron, 
silver, gold, copper, and lead, it was owing chiefly to the coun- 
try's natural endowment of broad and fertile acres, favourable 
climate, and rich mineral resources. Until the present day suc- 
cessive generations of Americans have been able to reap large 
profits from the exploitation of these natural resources. The 
same process will continue for many years longer, but already 
there are indications that the richest treasures of nature in 



Conclusion 45 

virgin land, primeval forests, and mineral deposits, have been 
taken and that the people must accustom themselves to a slower 
rate of progress and a less generous response to their labour. 

REFERENCES FOR COLLATERAL READING 

Lodge, A Short History of English Colonies in America; Mc- 
Master, History of the People of the United States, Volumes I. and 
II.; * Wilson, Division and Reunion; Rand, Economic History 
since 1763; '^Turner, The Significance of the Frontier in American 
History: Taussig, Tariff History of the United States; *Shaler, 
The United States of America, 2 vols.; * Whitney, The United 
States; Wright, The Industrial Evolution of the United States; 
Tarr, Economic Geology of the United States; Statistical Abstracts 
Of the United States; Abstract of the Twelfth Census, 1900; * Co- 
mans, Industrial History of the United States. 



CHAPTER III 



PRELIMINARY SURVEY OF THE FIELD OF ECONOMICS 



The 

Motives to 
Business 
Activity 



§ 24. In the definition " economics is the social science of 
business " the last word is used in its broadest sense. It de- 
notes activity entered into, not primarily for its own sake, but 
for the sake of some indirect return. Business is thus, in a 
sense, " work " as distinguished from " play," but must not be 
thought of as necessarily disagreeable. It includes activity, 
that is, pleasurable mental or physical exercise, as well as effort, 
that is, exercise which involves some element of discomfort or 
pain. The rational man tries to arrange his work so that it will 
involve as little effort as possible. 

The motives to business activity are too familiar to require 
analysis. Men are so constituted that their happiness, their 
existence even, depends upon their having command over cer- 
tain material commodities and personal services. They must 
have food, shelter, and clothing in order to live. Such things 
.satisfy their primary, physical wants. Next come the more 
complex wants which civilisation has implanted in the human 
breast. Men desire tools, machines, conveniences for travel 
and social intercourse, and the countless other things which 
contribute to the comfort of modern life. The object of busi- 
ness activity is to create or obtain these material and imma- 
terial conditions to well-being. Primitive men went about 
the task directly. They killed game for food, erected their own 
huts, and made their own garments from the skins of animals. 
Their civilised brothers have learned that business activity is 
more fruitful when it proceeds by roundabout and co-operative 
methods. They spend much of their time in fashioning tools, 
machines, and other aids to production, and concentrate their 
attention on special tasks, relying on others to provide most 
of the things which they require. It is this indirectness of 

46 



Characteristics of Economic Man 47 

modern business activity which gives rise to many of the most 
important problems of economics. 

§ 25. In the broad sense in which the term " business " is Character- 
used in the definition of economics, it is evident that business ^^^''^^ of th« 

' . liconomic 

men and women are nearly as numerous in each community as Man 

the adult inhabitants. Even those who live entirely on incomes 
from property must be included, since their property plays a 
role in business even when they themselves do not. Excluded 
are children and old persons dependent upon others for sup- 
port and the so-called " dependent " classes, whose maintenance 
is a charge on the whole community. Among the latter are 
included not merely the insane, the blind, the deaf, criminals, 
paupers, etc., who are maintained in asylums and prisons, but 
also beggars, swindlers, and thieves who are still at large, but 
who support themselves not by useful work, but by preying 
upon the sympathy or the property of others. In confining 
his study to the business classes, the economist does not, of 
course, ignore the existence of these dependents. He simply 
leaves the special investigation of the problems to which their 
presence in society gives rise to his co-worker, the sociologist. 

A first step in the study of business is a clear analysis of the 
character and motives of the business man. Economists have 
been accused of setting up a purely imaginary business or 
" economic " man, and constructing a science to explain what 
business relations would prevail if all men were like the 
creature of their imaginations. To avoid this criticism we will 
begin with a characterisation of the typical business man to be 
found to-day in the United States and other countries in the 
same stage of industrial development. He has four traits 
which show themselves more or less clearly in all of his acts : 

(i) The business man pursues his own interest in his busi- Self- 
ness dealings and assumes that others will do the same. This ^^^erest 
does not mean that he is steeped in selfishness, but simply that 
from his point of view " business is business," not play nor 
philanthropy, and that he prefers to keep his getting separate 
and distinct from his giving. 

(2) In judging of his own interest the business man thinks The 
of himself not as an isolated individual, but as a member of ^^^er e 
different social groups, of which the family is by far the most 



Love of 
Independ- 
ence 

Business 
Ethics 



Utility 



48 Survey of the Field of Economics 

important. He works not for himself alone, but for his family, 
his union, his club, and, in times of emergency, his country. 
In different relations and at different times he identifies his 
interest with the interests of these organisations. For his 
family the economic man will sacrifice as much or more than he 
will for himself alone. 

(3) He desires to be financially independent. His ambition 
is to stand on his own feet, to make his own way, and, when he 
accepts assistance, to give an adequate return for it. 

(4) He is controlled in his business dealings by the code of 
business morality that pertains to his class. As there is honour 
even among thieves, so there are special standards that are 
accepted and lived up to by different business classes. These 
are not usually as high as the standards professed in churches, 
but they are much higher than current criticisms of business 
morality would lead one to think. To be maintained, hov/- 
ever, in communities where class barriers are constantly giving 
way, such standards have often to be reinforced by legal enact- 
ments. 

These four characteristics of the economic man are readily 
explained by a reference to the evolutionary process which has 
brought industrial society to its present stage of development. 
Self-interest as a dominant motive, for example, is the direct 
fruit of that struggle for existence which is still in progress 
and which makes self-preservation the first law of nature to 
every organic species. In the case of men, religious and other 
influences have tempered self-seeking with consideration for 
others, but since those who succeed best in rising above their 
natural selfishness, as did, for example, some of the monks and 
nuns of the Middle Ages, tend to dedicate their lives to the 
service of other people and other people's children, rather thaa 
to rearing children of their own and transmitting to them their 
moral excellencies, they count for relatively little in the stern 
evolutionary process that goes on through the ages. 

§ 26. The material commodities and personal services which 
satisfy human vv^ants are conveniently designated as goods, 
while the capacity or quality in goods which satisfies wants is 
called utility. As used in economics these terms are stripped 
of the moral implication that attaches to them in ordinary 



speech. Thus anything that satisfies a want has utility and is 
a good, whether it be the whiskey of the trader or the hymn- 
book of the missionary. 

Not all goods figure in business transactions. Such things Free Good 
as sunlight, air, and water are usually free goods for which 
no one expects or receives a return. They are supplied by 
nature in such abundance that there is enough of them for all 
and to spare. In general it may be said that whenever the | 
spontaneous supply of any good exceeds the desire for it, units \ 
of that good will be free. ^ 

In contrast with free goods is that vastly larger class of Economic 
commodities whose supplies are limited in comparison with the '-^^^'^'^^ 
desire for them and which are therefore objects of economy. 
These are appropriately named economic goods and taken 
together constitute the wealth to secure which men engage in 
business. The characteristic of economic goods is that they \ 
have value as well as utility. ' 

The term, value, is used in two distinct although closely Value 
related senses in economics, and this has given rise to a great 
deal of confusion. It may designate the importance which a 
person ascribes to a unit of a good as a condition to the satis- 
faction of his wants. This is value in the subjective sense and 
may be distinguished as value in use. In the phrases, "^ the U 
value of a loaf of bread to a starving man is beyond calcula- 
tion " and " no one knows the value of an object until he has 
to do without it," values in use are meant. The other sense of 
the term is that of value in exchange. When a bushel of wheat 
is said to be twice as valuable as a bushel of corn, it is the ex- 
change ratio between the two that is referred to. Value in 
exchange is thus the power of a good to command other goods 
in exchange for itself. In future in this work the word value 
by itself will be used in the sense of value in exchange. 

The three conceptions, utility, value in use, and value in Relation 
exchange, are analysed more fully in the chapter on Value and yr^^j^f^" 
Price. At this point it v/ill suffice to suggest very briefly the and Value 
relation which they bear to each other. Free goods have no 
value in use, that is, single units of such goods have no impor- 
tance as conditions to the satisfaction of wants. Thus a cubic 
foot of air in the room in which the reader sits has i\o value. 



Valne in 
Use and 
Value in 
Exchange 



Price 



50 Survey of the Field of Economics 

although it has utihty, because it would not be missed if with- 
drawn. Other air would rush in from adjoining rooms and 
from outdoors and the equilibrium of atmospheric pressure 
would be almost immediately re-established. If the room were 
made air-tight, hov/ever, and one cubic foot of air after an- 
other were withdrawn, the situation would be quite changed. 
Now, instead of being indifferent, each cubic foot of air would 
be of importance ; and as one cubic foot after another was with- 
drawn this importance would steadily increase. As the air 
became thinner, discomfort, strangulation, and finally death 
would ensue, unless the process of exhaustion could be checked. 
The reader would in this case ascribe high value to air, holding* 
it as precious when at the last extremity as life itself. As this 
illustration indicates, value in use is variable and measures the 
extent of man's dependence under the given conditions of 
supply upon a unit of the good being valued. 

The relation between value in use and value in exchange is 
somewhat more complex. At the outset it is obvious that a 
good must have value in use to someone as a condition to its 
having value in exchange. Such value in use may be imme- 
diate as in the case of goods finished and ready for consump- 
tion, or remote as in the case of raw materials. Unless it is 
present there can be no value in exchange for the simple rea- 
son that no one will give anything for something which no one 
considers of any importance. In the second place a good 
which has value in use to two or more persons so situated that 
they may have business dealings with each other will normally 
have value in exchange. This may be inferred from the defini- 
tion of value in use, since a good which is of importance to the 
well-being of two or more persons can hardly fail to be worth 
something in other goods. Since value in exchange never 
arises in the absence of value in use, and, on the other hand, 
normally results when value in use is present, there must be a 
close causal connection between the two. The explanation of 
this connection mmst be deferred to Chapter V. 

Closely related to value in exchange is another familiar con- 
cept, that of price. As ordinarily used in business conversa- 
tion price designates exchange value measured in terms of 
money, money being the universal medium of exchange. In 



Production and Consumption 51 

the United States prices are expressed in dollars and cents, and 
the dollar is maintained, by means of regulations described in 
Chapter XVIL, as the invariable exchange equivalent of 23.22 
grains of pure gold. It follows that current American prices 
indicate the quantities of the commodity gold, for which units 
of the commodities priced would exchange on the given date 
in the given market. 

^2y. The limitation on the supply of goods which makes 
them economic or valuable may be due to the fact that they 
are unique, that they are controlled by a monopoly, or simply 
that business activity is required to bring them into existence. 
Examples of absolute limitation are afforded by old coins or 
stamps, pictures by deceased artists, etc. Such goods often 
acquire with age a value out of all proportion to the esteem in 
which they were originally held. Monopolised goods are 
equally familiar. Such are patented goods and those produced 
by means of secret processes. Most common of all are goods 
whose supplies are limited simply because business activity is 
needed to create them. , 

The creation of economic goods, or, more accurately, of the production 

utilities embodied in them, is called production. It is the chief ¥-^^ ^9"" 
-,. .. ^ ,.,.. sumption 

purpose of busmess activity. Contrasted with it is consump- 
tion, the destruction of utilities incidental to the satisfaction of\ 
wants. The latter, as already suggested, furnishes the prin- 
cipal motive for business activity. Consumption must, for the 
sake of clearness, be sharply contrasted with mere utilisation, 
as for example of fuel or raw materials in manufacturing. The 
latter, although sometimes described by the misleading phrase 
" productive consumption," is really production itself. 

Every individual is of necessity a consumer of economic 
goods. If he is not a producer as well, the world is made 
poorer because of his existence. What he eats, drinks, and 
wears is so much taken from the limited stock upon which all 
must subsist. Looked at from the point of view of the col- 
lective good, such an individual is either a recipient of charity 
or a parasite or both. In judging of a person's standing as a 
producer, full credit must be given for the creation of those 
immaterial goods upon which the world's happiness so largely 
depends. Services as well as commodities contribute to human 



The State 
of Normal 
Equilib- 
rium 



Effort and 
Sacrifice 
Involved in 
Production 



52 Survey of the Field of Economics 

well-being, and the field of economic study would be barren 
indeed if they were left out of account. Allowance must also 
be made for the part which property, like land, buildings, etc., 
plays in production. In the United States the moral sense of 
the community approves on the whole of the institution of pri- 
vate property and hesitates to condemn a person who lives in 
idleness, so long as he confines his consumption to the goods 
which the income from his property enables him to purchase. 
It would be inaccurate, therefore, in the present stage of eco- 
nomic development to characterise such a person as either a 
recipient of charity or a parasite, although the presence of 
such persons in society itself constitutes a strong argument 
against the continuance of the institution of private property 
which makes their existence possible. 

It is important for the student to form a clear mental picture 
of economic goods or wealth as an aggregate. To this end 
production may be thought of as a vast network of pipes all 
conveying products, i. e., valuable commodities and services, 
to a central reservoir, from which they are distributed by means 
of consumption pipes to the individuals who make up society. 
Obviously if the streams of goods entering through the pro- 
duction pipes are just equalled by the streams of goods passing 
out through the consumption pipes, society's wealth is neither 
increasing nor decreasing. This is the situation described later 
as that of normal equilibrium. It is full of scientific interest 
because while it continues economic forces just balance each 
other and opportunity is afforded to study the business world 
as it would be if all influences were permitted to v/ork out 
their full effects free from disturbing changes. 

§28. Most goods are limited in supply (and consequently 
valuable) simply because business activity is needed to create 
them. To the extent that business entails effort it is obvious 
why its products must normally have value. If they did not, 
business men would be under no inducement to produce them. 
But business is often merely a form of pleasurable activity. 
Why, it may be asked, are not goods which it is a pleasure to 
create, such as the products of talented artists, multiplied until 
they become free like the superabundant gifts of nature ? Two 
circumstances prevent such a result. 



.. The Cost of Production 53 

In the first place artistic talent is rare in comparison with the i 

demand for artistic products. Even if all artists of first-rate 
ability were so constituted that they could derive unalloyed 
pleasure from their work during ten hours out of every twenty- 
four, there would still be a scarcity of artistic products which 
would prevent them from being free goods. But few if any 
artists are able to work even ten hours a day without incurring 
a sacrifice, and this is the second circumstance. Production 
and consumption are mutually exclusive and each takes time. 
It follows that the hours spent, no matter how pleasantly, in 
production, are hours substracted from the consuming periods 
As long as the hours devoted to business activity afford more 
pleasure than v/ould the same hours devoted to leisurely con- j 

sumption, the former involves no sacrifice. But as work is 
continued through the day it loses in interest, while leisurely 
consumption gains in attraction. In consequence after a fevir 
hours' toil the balance is usually turned and work, even though 
still pleasurable, ceases to be more pleasurable than consump- 
tion. In this situation to continue to produce is to make a 
sacrifice. As the economic man declines to put forth effort that | 
is not rewarded in valuable products, so he declines to incur f 
sacrifice that is not similarly recompensed. This fact limits { 
the supplies of all goods except those which nature furnishes I 
m superabundance, and is one of the fundamental causes of 
value. 

It might be thought that improvements in methods of pro- 
duction would increase the number of free goods, but experi- 
ence seems to show that wants multiply even more rapidly than 
processes improve and that the number of free goods is grow- 
ing smaller rather than larger as time goes on. Even water 
and pure air, to people who live in cities, are now among the 
economic goods v/hich command a price. 

The sum of the efforts and sacrifices that are involved in The Cost o£ 
production constitute what is known in economics as the cost Production 
of production. They are the advances which must be recom- 
pensed in the value of the product, if actual loss in well-being 
is to be avoided. Under favourable circumstances such cost 
involves only sacrifices, that is, the doing of things that 
are less pleasurable than other things that might be done, 



54 Survey of the Field of Economics 

but free from any element of pain. The tendency of evolu- 
tion appears to be clearly towards bringing all costs to this 
level. As the same productive tasks are performed genera- 
tion after generation human organisms become adapted to 
them so that children do with ease what their fathers could do 
only with difficulty and effort. If methods of production 
were not constantly changing so that muscles and nerves are 
required to adapt themselves to ever new situations a stage 
might soon be reached in which all production would be pain- 
less. This is one of the goals towards which economic prog- 
ress should consciously be directed. 

To be contrasted with the costs of production, which are 
psychological or subjective, are the expenses of production, 
that is, the advances made for materials, labour, and all the 
other things which co-operate in bringing about productive 
results. The latter are objective and may be expressed as sums 
of money comparable with the prices received for products. 
Work § 29. Until the last one hundred and fifty years it was cus- 

tomary for most families to produce for themselves most of the 
things which they required. Under such conditions the rela- 
tion between work and pay was very simple. Each person got 
all or a portion of the identical things which he produced and 
was made to feel keenly his dependence upon his own exer- 
tions and upon favouring natural conditions. The introduc- 
tion of machinery and the era of specialisation to which it has 
given rise have changed this situation. At present most fami- 
lies produce but little for their own direct consumption. Those 
who dwell in cities and towns, and even those who dwell in the 
country, produce for the most part for the market and rely 
upon the market for the things which they require. Nor is 
this the only com_plication. The great majority in modern 
communities produce as hired workmen and have no direct 
"share in what they produce nor knowledge of the conditions 
ander v/hich the product is marketed. They receive as their 
compensation wages or salaries agreed upon beforehand and 
shift to their em.ployers responsibility for the success of the 
productive process in which they are engaged. Under these 
conditions the problem of work and pay has become one of 
the most difficult in the whole field of economics. 



Wages 55 

Foremost among the world's workers are the so-called cap- The 
tains of industry or entrepreneurs* who direct industrial ^"^"^^^'^ 
processes. Their remuneration comes to them as profits or 
balances left over from the sale of products after all of the 
expenses of production have been paid. Below them are the 
lieutenants of industry, the salaried managers and bosses, and 
at the bottom the rank and file of the industrial army which is 
paid its remuneration in the form of monthly, weekly, or daily 
wages. A complete explanation of wages involves a study of 
the causes that determine the prices of the products of industry 
out of which money wages ultimately come, of the circum- 
stances which determine labour's share of these prices, and 
finally of the terms on which money wages are exchanged 
for the goods which labourers consume, since the latter consti- 
tute the real wages of labour. Each one of these subjects of 
inquiry represents an obstacle which under present conditions 
intrudes itself between the product of labour and the pay of 
labour and causes wage-earners to feel themselves dependent 
for their remuneration upon the good-will of employers even 
more than upon the quantity and quality of their work or the 
favourableness of natural conditions. 

Under the manorial system the most important influence fix- Wages 
ing the pay of villeins was, as has been shown, the custom 
which determined how large an allotment of land the villein 
should receive and what services he should render in ex- 
change for it. In the age of Elizabeth custom was supple- 
mented by law and judicial regulation in the determination of 
this important matter. Not only were laws passed fixing the 
rate of pay for particular kinds of work, but the general rule 
was established that the justices of the peace should have power 
to regulate wages. Neither custom nor law now plays much 
part in the fixing of wages. Their determination is left to free 
bargaining in all Western countries, and it is difficult for most 
people to even entertain the idea of a different system. Of no 
country is this more true than of the United States. Ameri- 
can courts have over and over again declared that the rights 

*The English equivalent of this word, ''undertakers," is occa- 
sionally employed in the above sense, but is open to obvious ob- 
jections. 



Property 
and Its 

Earnings 



The 

Methods of 
Economics 



56 Survey of the Field of Economics 

to liberty and to property guaranteed in all of the State con- 
stitutions embrace the right of employer and employee freely 
to contract or bargain, and that laws attempting to abro- 
gate freedom of contract and to put in its place custom 
or legal regulation as the determinants of wages are unconsti- 
tutional. As is pointed out in the chapter on the Legal Regu- 
lation of Labour, there is reason to think that judges have gone 
too far, at times, in their application of this principle, but its 
fundamental importance to the present industrial organisation 
is beyond question. 

§ 30. Next to the right freely to contract, the right to prop- 
erty is the one most jealously guarded by modern governments. 
The significant aspect of the right to property in this connec- 
tion is the right to use it as a means of securing income. Eng- 
lish and American law distinguishes between real and personal 
property. Economics, in rough conformity to this classifica- 
tion, distinguishes between land and other gifts of nature, and 
capital goods, that is, products of past industry used in the 
present as aids to further production. Both forms of property 
afford incomes to their possessors, that from land being known 
in economics as rent and that from capital goods as interest. 

The problem of property and its earnings is quite as com- 
plicated as that of work and pay. In it are involved not merely 
economic, but moral relations of the profoundest significance. 
The economist must not merely explain the reasons for the 
earnings assigned to property and the circumstances that deter- 
mine their amount, but he must also supply the basis for a wise 
decision as to the social utility of the system which permits 
these earnings to go to individual property owners. It is cus- 
tomary in treatises on economics to group together all of the 
problems connected with work and pay and property and its 
earnings into one great department of the study known as 
Distribution. This has to do with the causes which determine 
the division of economic goods between the individuals in in- 
dustrial society. It is the concluding stage in the process of 
production, and a necessary preliminary to consumption. 

§ 31. The methods of economics are the same as those of 
other sciences, but the complexity of the phenomena treated 
makes great caution as to the use of these methods necessary. 



The Methods of Economics 57 

The method upon which most rehance was placed by the older Deduction 
English economists was the deductive, or a priori. It consists, 
as treatises on logic explain, in reasoning from general propo- 
sitions to their particular applications. In economics many of 
the most important of the general propositions or premises 
used are borrowed from other sciences {e. g., psychology, law), 
and this makes some knowledge of these subjects an indispen- 
sable part of the mental equipment of the economist. When 
a premise is only roughly accurate, as is for example the 
assumption that wages are determined in the United States by 
free and equal bargaining between employers and employees in 
which each pursues his own interest with the same persistency 
and the same knowledge of the situation as the other, it goes 
without saying that conclusions will be only roughly accurate 
also, and will need to be tested if not corrected by experience. 
Since rough accuracy is all that can be claimed for most of the 
assumptions used in economics, the student must be particu- 
larly careful to weigh the conclusions reached at each stage of 
a long deductive argument, before he attempts to give them 
practical application. 

The inductive, or a posteriori^ method is just the reverse of Induction 
the deductive, since it consists in summing up a number of par- 
ticular propositions in a general conclusion. By means of in- 
duction the detailed observations of like phenomena, which 
result from the field work of science, are grouped together in 
general statements. The latter then serve as the premises for , 
deduction, which carries the conclusion beyond the range of 
direct observation. To be sure of the accuracy of the result 
the scientist must appeal to observation again as a means of 
verification. The progress of science thus begins and ends 
with observation. 

Where the phenomena to be observed are as numerous as Statistics 
they are in economics, induction may take the form of statistics. 
Individual instances of the same phenomenon are counted and 
the result given in numerical form. By means of statistics a 
quantitative value is given to the conclusions of induction 
which justifies greater confidence in them. The statistical 
method is applicable as yet to only the simpler problems of the 
science, but such progress has recently been made in the col- 



58 Survey of the Field of Economics 

lection and tabulation of statistics that there is every reason to 
anticipate results of steadily increasing importance from its use 
in future years. 
The § 32. Much confusion exists in regard to the nature of the 

Ei=onomics ^^^s of economics. Some writers declaim against govern- 
mental policies which they do not like on the ground that they 
are violations of economic law. Others are equally vociferous 
in affirming that economic law cannot be changed by any act 
of the legislature. Neither statement, as it is ordinarily under- 
stood, is true of economic law in the scientific sense. 

A scientific law is a statement of the relation that is believed 
to obtain between phenomena. This relation may be one of 
coexistence or of sequence. To illustrate, it is a law of eco- 
nomics that the prices at which identical units of any good are 
sold in markets between which such units may pass freely with- 
out any deterioration in quality or loss in quantity, will not for 
any length of time differ by more than the expense of carriage 
between such markets. This is a law of coexistence which is 
proved by deductive and confirmed by inductive reasoning. 
Again, it is a law of economics that an increase in the supply 
of the units of any good offered for sale in any market tends 
to lower the price that can be secured for it. This is a law of 
sequence. In both cases, it should be noted, there is implied 
or expressed the absence of disturbing factors. Free com- 
munication between the markets must be maintained or the 
first law ceases to hold good. The second law describes a 
tendency. The increased supply may not actually cause a fall 
in price because it may be offset or more than offset by an in- 
crease in demand. In the statement of all economic laws it is 
taken for granted that other things remain the same so that 
the influences upon which the operation of the lav^r de- 
pends will have an opportunnity to work out their normal 
effects. 

To be contrasted with law in the scientific sense, are law in 
the moral and law in the juristic sense. Moral law states not 
what is but what ought to be. It is in this sense often that the 
term economic law is used when particular policies are said to 
violate it. It needs no argument to prove that such a use of 
the term has no place in a scientific treatise. Law in the 



The Laws of Economics 59 

juristic sense has already been defined and is not likely to 
cause confusion. 

The statement that economic law cannot be changed by legis- The Neces^ 
lation is literally true. It is equally true, however, that eco- Reciting 
nomic conditions may be changed by legislation and that this Economic 
may render entirely inapplicable economic laws that were pre- 
viously significant. The development of the legal system of* 
each industrial society makes necessary a continuous recast- 
ing of the laws of economics if that science is to remain in vital 
relation with actual business conditions. Old premises must be 
discarded and new premises in harmony with the new situa- 
tion must be formulated. For this reason the implication of 
the statement " economic law cannot be changed by legisla- 
tion," that is, that legislation cannot give a new direction to 
economic forces and in that way modify old relations between 
economic phenomena, is quite misleading. 

§ 33. In the following chapters the different divisions of eco- Outline 
nomics are treated in the order suggested in the preceding °^ ^^**'' 
survey. The subject of consumption is first discussed as an 
introduction to a fuller treatment of value and price. Then 
follow chapters on production and distribution, in which the 
leading principles of the subject are explained. The work 
concludes with chapters on money and on problems of the day 
falling within the scope of economics. In the closing chapter, 
on Economic Progress, suggestions scattered through the book 
are brought together with a view to showing the direction in 
which industrial society is believed to be moving. 

As a conclusion to this preliminary survey a word of caution Conclusioa 
may not be out of place. Econom.ics is an intensely human 
study. Dealing as it does with relations upon which the well- 
being of individuals and even of whole social classes depends, 
it makes constant appeals to the sympathies. This fact serves 
to make it interesting, but it has the disadvantage of appealing 
to the emotions, when emotion can only serve to bias the judg- 
ment, as well as when it may help to right wrongs and to pro- 
mote progress. In studying the principles of economics, pas- 
sion, except the passion for truth, is out of place. What is 
needed is the same calm judgment that has done so much to 
advance the natural sciences. The student should constantly 



6o Survey of the Field of Economics 

have in mind the thought that his primary task is to explain 
existing business relations. He must understand how they 
came to be, and the forces that perpetuate them. He must de- 
tect the laws which govern them and try to see them in their 
proper perspective as features in a great evolutionary process. 
Only when he has fulfilled this purely scientific part of his 
task is he equipped to take up the discussion of practical prob- 
lems and to throw his weight on this side or that in accord- 
ance with the dictates of his trained judgment. If he takes his 
task seriously he is very apt to discover that, as he comes to 
understand the interaction of economic forces better, he is less 
confident in his demands for changes and less sanguine of his 
ability to accom.plish even those modifications in law or prac- 
tice which he still believes to be desirable. He need not 
fear, however, that the results of his study will be purely 
negative or that the subject will lose its fascination as he pene- 
trates more deeply into it. It will remain to the end intensely 
human, and for every radical change that is discountenanced by 
better knowledge, a hundred m.inor changes will suggest them- 
selves, many of which he may himself live to see fulfilled. In 
place of the feeling that the world is hopelessly awry, which 
so often oppresses high-minded people when they observe the 
injustices and inequalities to which the poor are daily subjected 
and the false and vulgar standards that are too frequently char- 
acteristic of the rich, the conviction is likely to grow in his miind 
that an evolutionary process is going on which has for one of 
its results a gradual improvement in the conditions under which 
the mass of men live and work. This conviction should not 
and will not lessen in the least his desire to contribute his share 
towards a m.ore rapid progress, but it will help to reconcile him 
to conditions which are only tolerable because they are 
temporary. 

REFERENCES FOR COLLATERAL READING 
^Marshall, Principles of Economics, Books I. and II.; *C/«r/?, Tao 
Philosophy of Wealth, Chap. I.; Walker, Political Economy, Part 
I.; Ely, Outlines of Economics, Chap. X., Book I.; Chap. I., Part 
I., Book 11.; *Gide, Political Economy, Book I.; Keynes, The 
Scope and Method of Economics; Palgrave, Dictionary of Political 
Economy, articles entitled " Economic Science," " Method o€ 
Political Economy," etc ; * Fetter, Principles of Economics. 



Bibliographical Note 6i 

BIBLIOGRAPHICAL NOTE 

Because of the diversity of views which it presents, the liter- 
ature of economics is likely to prove confusing to one who takes up 
the study for the first time. In order to see the relation between 
different writers and different schools, the beginner will do well, 
before he ventures far into the subject, to read a brief history of 
economic theory. 

Ingram's History of Political Economy and Price's Political Econ- 
omy in England may be recommended for this purpose. Cannan's 
History of Theories of Production and Distribution may then be read 
in connection with the works which it discusses. It will be found 
helpful to learn something about each author before reading what he 
has to say on any particular topic, and to this end dictionaries of 
political economy should be used. The standard English work is 
Palgrave's Dictionary of Political Economy, in three volumes. 
Readers of German should consult also Conrad's admirable Handwor- 
terbuck der Staatswissenschaften, in seven volumes, while readers of 
French will find Say's Diction7taire d' £conomie Politique, in two 
volumes, helpful. 

The principal writers who have contributed to the literatiire of eco- 
nomics available in English may conveniently be distinguished into 
four groups: 

I. " The English classical school " is the term applied to Adam 
Smith {The Wealth of Nations), Malthus {Essay on Population), 
Ricardo {Principles of Political Economy and Taxation), and John 
Stuart Mill {Principles of Political Economy), and their followers. 
Rae's Life of Adam Smith, Bonar's Malthus and His Work, and J. S. 
Mill's Autobiography may be read with profit in connection with the 
works of these authors. 

II. A reaction against the doctrines and method of the classical 
school began about the middle of the last century, and to it the term 
"historical school" is usually applied. The chief representatives of this 
school in Great Britain wece Cliffe Leslie (Zi^.-*^^ Systems and Indus- 
trial Economy of Ireland, England, and Continental Countries; 
Essays in Political and Moral Philosophy) and Toynbee {The Indus- 
trial Revolution). The school has had its greatest development in 
Germany, where it is now represented by Gustav Schmoller {The 
Mercantile System), at the University of Berlin, Karl Biicher {In- 
dustrial Evohition) at the University of Leipsic, and other dis- 
tinguished economists. 

III. A reaction against the classical school in quite a different 
direction is usually spoken of as the " Austrian school " because of 
the large part which the Austrian economists Carl Menger, Bohm- 
Bawerk, and Wieser have played in its progress. In Great Britain it 
has been represented by Jevons {Theory of Polilical Economy ; Money 
and the Mechanism of Exchange) and Smart {Introduction to the 
Theory of Value; Distribution of Income). The important works of 
Bohm-Bawerk {Capital and Interest; The Positive Theory of Cap^ 



62 Survey of the Field of Economics 

ital) and of Wieser {Natural Value) have also been translated into 
English, by Professor Smart and one of his pupils. 

IV. Few contemporary I^ritish or American writers would care to 
be classed rigidly with either of the three schools referred to. For 
that reason it seems best to treat them as a separate group. Prom- 
inent among English economists are Marshall {Principles of Eco- 
nomics; Economics of Industry), Edgeworth (articles on The Measure- 
ment of the Value of Money and other topics in the British Econotnic 
Journal), Nicholson {Principles of Political Economy, 3 vols. ; Money 
and Monetary Problems), Cannan {Theories of Production atid Dis- 
tribution), Bonar {Philosophy and Political Economy; Malthtis and 
His Work), Rae {Life of Adam Smith; Contemporary Socialis?n; 
Eight Hours for Work), Bastable {Public Finance; The Theory 
of International Trade), and Hobson {The Evolutioft of Modern 
Capitalisni). 

Among American economists should be mentioned the late General 
Walker {Political Economy; The Wages Question; Money; Inter- 
national Bimetallis7n) and the-^late Professor Dunbar ( Theory and 
History of Banking). Prominent among contemporary writers are 
Sumner {History of American Currency; Lectures on the History of 
Protectionism in the United States), Clark {The Philosophy of 
Wealth; The Distribution of Wealth), Patten {Consumptio7i; The 
Theory of Dynamic Economics; The Theory of Prosperity), Adams 
{Relation of the State to Industrial Action; Public Debts; The Science 
of Finance), Hadley {Railroad Transportation; Economics), Ely {Prob- 
lems of To-day ; Outlines of Economics; Monopolies and Trttsts), Selig- 
man {Essays in Taxation; The Incidence of Taxation; The Econojnic 
Interpretation of History), Taussig {Tariff History of the United 
States; Wages ajtd Capital), and Jenks {The Trust Proble7n). 

Although by no means exhaustive the above list of authors and 
titles will serve to give some idea of the scope of the general liter- 
ature of economics. It may be supplemented by the excellent 
bibliographies contained in the following works: Bowker and lies. 
The Reader's Guide in Economic, Social, afid Political Science; Cossa, 
■ Introduction to the Study of Political Economy ; Bullock, Introduction to 
the Study of Ecofto?nics ; Dewey, Financial History of the United States. 

Much of the contemporary literature of economics must be sought 
in the monographic series published by the American Economic 
Association and by the leading universities. The principal peri- 
odicals devoted in whole or in part to economics are: The Quarterly 
fournal of Ecofiomics (Harvard University, 188&-1903, 17 vols.); 
\ Political Science Quarterly (Columbia University,'i 886-1903, 18 vols.); 
Annals of the American Academy of Political and Social Science 
(Philadelphia, 1890-1903, 21 vols.); The Yale Review (Yale University, 
1 892-1903, II vols.); The fournal of Political Economy (Chicago 
University, 1892-1903, 11 vols.); The British Economic fournal {Br'xtisb. 
Economic Association, London, 1891-1903, 13 vols.); The Economic 
Review (London, 1891-1903, 13 vols.). 



CHAPTER IV 
THE CONSUMPTION OF WEALTH 

§ 34. Consumption, as has already been suggested, is the Character- 
part of economics which treats of the relations between wants Human 
and the means to their satisfaction, goods. The characteristics Wants 
of wants first demand attention. 

It is a familiar fact of human experience that wants are in- 
definitely numerous. Every day, in the consciousness of every 
normal person, many wants are- felt which must perforce go 
unsatisfied. At times one may delude one's self with the belief 
that if only some pet desire were gratified perfect content would 
follow, but over and over again the discovery is made that 
when the wished-for gratification comes, other desires have 
arisen in its place and satisfaction is as far off as ever. The 
normal man is thus a being whose wants constantly run ahead 
of his ability to satisfy them. Upon this simple fact is based 
the law that the consuming power of a community is indefi- 
nitely great. 

A second familiar characteristic of wants is that they are of 
very different degrees of intensity. This is realised as soon as 
one tries to arrange all of the wants of which he is conscious 
in a scale according to their importance. Such an endeavour 
reveals also the difficulty of measuring wants and the com- 
plexity of those which direct daily life. Corresponding to 
every want that comes within the scope of economics, is a 
utility or combination of utilities capable of satisfying it. The 
intensities of wants determine degrees of utility and thus, as is 
shown later, have great influence in fixing the values of the 
economic goods in which utilities are embodied. 

§ 35. Variable as they are in intensity, all wants are subject Law of Di 
to a law of gradual diminution and final satiety as consump- utilitv^°^ 
lion is continued. This may be illustrated by reference to food. 
A healthy American boy, given a breakfast of unlimited 

63 



64 



The Consumption of Wealth 



buckwiieat cakes, attacks the first plateful with great avid- 
ity. His eagerness is reduced by each additional plateful, 
until his hunger is satisfied and he must reluctantly confess 
that he has had enough. As an individual's capacity to 
enjoy food is limited, so is his capacity to enjoy clothes. A 
normal person feels intensely the need of one respectable 
suit of clothes, pair of shoes, etc. A second suit is less 
indispensable, but satisfies a lively desire. Additional suits 
satisfy wants of steadily diminishing intensities, and 
in time the point of satiety is reached even by the most 
fastidious dandy. Less material wants obey the same law. 
Eyes tire of beautiful pictures or beautiful scenes. Ears are 
deadened in time by even the sweetest music. In short, 
each receptive faculty is subject to exhaustion and re- 
quires time to recuperate. Upon this psychological principle 
is based an economic lav/ of considerable importance, that of 
diminishing utility. We may formulate it as follows : The 
ntilities of additional units of OAiy good to any consumer 
diminish normally as his supply of units of that good increases. 
This law assumes, of course, that no change takes place in the 
character of the consumer as his supply is being increased. 

§ 36. Tlie normal man lives in the present and will make 
greater sacrifices to insure the satisfaction of present than of 
future wants. Though very general, this characteristic of 
wants is more marked for some social classes than for others. 
It would not be far from the truth to say that young children 
and savages live entirely in the present ; that the manual labour- 
ing classes, especially in climates where the winters are mild, 
look only a few months or a few years ahead in their economic 
calculations ; that the great middle class of artisans and mer- 
chants plan with reference to their own lives and the lives of 
their children ; and that the founders of great family fortunes 
include generations yet unborn in their view. The lack of 
providence of the coloured family, which, when told on Monday 
morning that it v/ould be turned out if the rent were not paid 
by the following Saturday, agreed that then " they needn't be- 
gin to worry until Friday," is well-nigh incredible to sober and 
industrious workingmen of the white race. But equally unin- 
telligible to careful and thrifty members of the class next higher 



Present vs. Future Goods 65 

in the economic scale, is the readiness with which these same 
workingmen enter upon the responsibilities of married life 
without property or guarantee of continuous employment. It 
is in these psychological differences that economists discover a 
chief reason for the persistence of the inequalities of fortune^ 
which are a principal cause of dissatisfaction with the present 
industrial system. 

I This fourth characteristic of wants is the basis of a second 
law in regard to utility which has reference to the time of con- 
sumption rather than to the quantity to be consumed. If goods 
available for present consumption are called present goods, and 
those to be available in the future — which may exist in the 
present as unfinished materials — future goods, the law may be 
formulated as follows : The utility of future goods is less to the ;f 
normal consumer than the utility of present goods of like kind 
and quality by an amount varying directly with the degree of 
futurity. "^ 

§ 37. A fifth and last important characteristic of wants is Wants D&' 
that most of them are determined by social standards of taste i^y Social 
rather than by the independent judgments of the individual Standards 
consumers. This is conspicuously true of wants for clothing, 
shelter, and forms of amusement. That men — not to say 
women — dress with reference to the opinions of their neigh- 
bours, changing the style of their shoes, their clothes, and even 
their collars and neckties, to conform to the vagaries of fashion, 
is a fact of familiar observation. There is a little more inde- 
pendence in the selection of dwelling houses, but here too the 
taste of the many is subservient to that of the few who form 
independent judgments. As regards amusements it is notorious 
that one fad follows another, bicycle riding giving place to golf 
and the latter to automobiling. 

This tendency of whole groups of people to want the same j 
thing at the same time has its good and its bad economic side. \ 
Its advantage is that it permits large-scale production, which i 
means usually production at less cost in human effort than pro- | 
duction on a small scale. As an offset to this, great waste re- 
sults from constant changes in fashion, not only because goods 
are produced which no one will buy, but because the machinery, 
tools, and factories designed for their production must be 
* For further discussion of this law see §166, p. 296. 



66 The Consumption of Wealth 

thrown away or adapted to new uses. Moreover, deference to 
social standards encourages a deadening uniformity in habits 
of consumption which is inimical to progress. This bad side 
is seen conspicuously in connection with architecture in the 
United States. Succeeding the colonial style of building came 
a series of styles each one worse than its predecessor. Slavish 
imitation of these bad styles has cumbered the earth from one 
end of the country to the other with ugly buildings which are 
the despair of architectural reformers. 
The Law § 38. Closely related to the law of diminishing utility is the 

law of demand. Since successive units of any good satisfy less 
and less intense wants, the desire for successive units di- 
minishes. Demand, as the term is used in economics, denotes 
effective desire, that is, desire coupled with ability to pay the 
cvirrent price for the desired object. The general law of de- 
mand is that it varies directly with changes in the intensity of 
wants and inversely with changes in the prices that must be 
paid for goods. To illustrate, the development of a new taste 
increases a person's demand for the good capable of satisfying 
that taste. More of that good will be purchased even though 
its price remains as before. On the other hand, even though 
a person's taste be unchanged he will be inclined to purchase 
more of a good whose price is reduced. 

When demand increases or decreases readily in response to* 
price changes it is said to be elastic. This is the case with the 
demand for goods which are on the border line between neces- 
saries and comforts. A slight fall in the price of such goods 
brings them within the reach of many consumers who before 
could not afiPord them. At the other extreme are the very 
cheap necessaries used by all classes, such as potatoes, salt,, 
sugar, etc., in the United States. A fall in the price of such 
goods will not increase the demand for them materially because 
everyone is already consuming them nearly down to the point 
of satiety. Where the conditions of production are variable, 
the costs of transportation prohibitive of shipment to distant 
markets, and the product itself perishable, it may, and often 
does, happen that the supply of goods for which the demand is 
inelastic exceeds the demand even at the lowest prices. At 
such times such goods become a drug in the market and any- 



The Law of Variety 67 

one may have them who will go to the trouble of carrying them 
away. This situation is not unusual in country districts in the 
United States with reference to such staple crops as potatoes 
and apples. The elasticity of the demand for a good thus has 
an important bearing upon the risks connected with its produc- 
tion. Elasticity of demand means stability of prices, inelas-l 
ticity variability. To escape the latter in the case of commodi- 1 
ties like salt, sugar, etc., for which the demand is quite in- 
elastic, has been a principal motive leading to the organisation 
of some of the trusts discussed in Chapter XXV. 

§ 39. The normal purpose of consumption is to afford pleas- The Law 
ure. Since each kind of good is subject to the law of diminish- ° ^"® ^ 
ing utility, the pleasures of consumption may be increased by at- 
tention to the law of variety. If a man has only corn bread 
for breakfast, to satisfy his hunger he must push his consump- 
tion of it beyond the point where it affords him appreciable 
satisfaction. If to his corn bread are added bacon, eggs, and 
coffee, he will be able to supply his body with adequate nour- 
ishment, without being obliged to eat corn bread after he has 
ceased to relish it. Eating has been taken to illustrate the law 
of variety because it is a universal experience, but the law ap- 
plies equally well to other forms of consumption. It is really 
a corollary of the law of diminishing utility, since that law 
itself suggests the necessity of passing from one form of con- 
sumption to another to avoid the uncomfortable feeling of 
satiety. The ideal which the economic man should, and does 
unconsciously, have in mind is that of carrying each kind of 
consumption only to the pomt where it becomes less pleasur- 
able than another form of consumption that may be enjoyed at 
the same expense. By changing to the new form of consump- 
tion whenever it affords the more pleasure, he is able to get 
the maximum satisfaction permitted by his income. 

The great obstacle to varied consumption is the expense of 
a varied assortment of goods, and this is felt most keenly wdiere 
men live in comparative isolation. Homesteaders in the 
western part of the United States, and others in similar situa- 
tions, have to content themselves with rough and simple fare, 
clothing, etc., because it does not pay them to make, in the small 
quantities adapted to their wants, those little things which con- 



68 The Consumption of Wealth 

tribute so much to the refinement of life. Every advance 
which tends to bring people into closer industrial relations is 
favourable to a more varied consumption and consequently to 
an increase in well-being. Recent improvements in transpor- 
tation facilities encourage the hope that the varied markets of 
the city will one day be brought within the reach of every 
country family, while city families will be given opportunities 
to share the free goods of the country. Such an arrangement 
will add enormously to the general vv'ell-being. 
TjieLawof § 40. Next to the principle of variety as a guide to judicious 
consumption stands the principle of harmony. Harmony of 
colour and form in dress is indispensable to a pleasing effect. 
In sculpture, painting, architecture, and music, harmony is the 
all-important requisite. Even in eating- harmonious combina- 
tions are important, as is attested by the pangs of indigestion 
which follow^ the consumption of such combinations as candy 
and beer, or milk and lobster. In a comparatively new country 
like the United States the average man is more likely to ignore 
the law of harmony than the law of variety. The American 
tendency is to exaggerate the importance of quantity and size 
to the neglect of the subtle harmonies which alone give perma- 
nent satisfaction. As a result there is relatively little demand 
in the United States for the taste and talent of artists and skilled 
artisans and great demand for the uniform and too frequently 
ugly products of machinery. Through this perversion of taste 
consumers lose half the pleasure which their incomes are capa- 
ble of affording. The effect on producers is equally unfavour- 
able for reasons explained in the next section. 
The Law § 41. A third aspect of consumption involves its relation to 

Social Cost production. It is important, by attention to the laws of variety 
and harmony, to obtain the largest possible return from the 
stocks of goods available for consumption. It is equally im- 
portant while securing a given return of pleasure from con- 
sumption, to select those goods which can be produced with 
the least expenditure of effort. This is the principle of least 
social cost. Its first application has reference to the natural 
conditions of a country. 

I Economic progress depends in part on the adaptation of 
^ men's wants to the productive capacities of the particular 



The Law of Least Social Cost 69 

regions which they inhabit, j When colonists settle in a new Adaptation 
country they bring with them a taste for the commodities they °^ ^^"' 
were used to at home. The soil and climate of their new en- to the En- 
vironment are rarely suited to the production of these identical vironmeat 
things, and hence their well-being depends for some time on 
the readiness with which they learn to like things for which 
the new soil and climate are suited. But men do not give up 
settled habits easily. They waste much time and effort in try- 
ing to make the land produce what they like, in place of learn- 
ing to like what the land can best produce. Thus in America 
it took the early settlers a long time to substitute a diet of In- 
dian corn for the diet of wheat and rye to which they had been 
accustomed in Europe, and many of their early disappoint- 
ments were due to their unsuccessful efforts to produce the 
latter. 

The law of least social cost prescribes consumption adapted! 
to the productive capabilities of the environment. Obedience! 
to it is brought about in time by an evolutionary process. ! 
Those who learn to like the things that can be most easily pro- 
duced where they live and to thrive on them, have an advan- 
tage over their neighbours. In time their offspring multiply 
and people the land. But the process may be hastened by in- 
telligent experiment, as has been repeatedly demonstrated in the 
industrial development of the United States. 

A second application of the principle of least social cost Adaptation 
refers to differences in the capacities and tastes of producers, pj-odu^rs 
Its importance may be shown by means of an example. Klotz 
is a poor German who has come to the United States with a 
talent for playing the violin and some knovv^ledge of shoemak- 
ing as his stock in trade. He settles in a town where there is 
little appreciation for music, and must therefore become a shoe- 
irjaker. The work is hard and uninteresting. Every da}^ he 
thinks how much pleasanter it would be to play his violin, but 
he must stick to his last or starve. As time goes on the town 
grows and people come to be Klotz's neighbours who appre- 
ciate his violin playing even more than his shoemaking. 
Through their efforts a small orchestra is organised with Klotz 
as leader, and it is not long before fondness for the music this 
orchestra can produce has become so general that Klotz finds 



yo The Consumption of Wealth 

that he can discard his leather apron entirely and give all of 
his time to the work that is his pleasure as well as his means 
of Hvelihood. By a change of taste in the community a discon- 
tented shoemaker is transformed into a happy musician. If 
the change has been genuine the community gets a full return 
for what it gives Klotz for his music. It affords as much if 
not more pleasure than did the shoes which Klotz used to 
make, but added to this pleasure of consumers is the new- 
found happiness of Klotz, the producer. 
Progress As this illustration suggests, the things that people want 

Changes in ^^^ ^^e willing to pay for are the things that must be produced. 
T^ste As consumers the members of society determine how they 

shall as producers spend their time and effort. As regards the 
necessaries of life consumers have perhaps no very great range 
of choice. They must learn to like those things that can be 
produced most easily in the given environment. If Klotz, the 
musician, gives up making shoes, someone else, who finds the 
task more congenial, must make them. But only a part of the 
community's income is spent for necessaries. If it prefers as 
comforts and luxuries articles which can be most advantage- 
ously produced in factories where automatic machinery im- 
presses its standards of unvarying uniformity not only upon 
the products turned out, but also upon the operatives engaged 
in making these products, then the ranks of factory labour 
must be crowded and other occupations must be neglected. If, 
on the other hand, it prefers music and objects of beauty, each 
one, however simple, reflecting the individuality of the artisan 
who has fashioned it with loving thought, then musicians, 
artists, and artisans will find remunerative employment and 
quite a different tone will be given to the common industrial 
I life. A community's taste thus gives direction to its work and 
I decides for better or for worse the kinds of lives that its 
I members shall live. 

Adaptation The law of least social cost has still another application. As 
to Laws of .„ , , . , , , , . . , - , , 

Economi- Will be shown m a later chapter "^ the pnnciple that large-scale 

cal Produc- production is more economical than small-scale production is 

subject to important exceptions. In some cases, as for example 

in the production of agricultural products from a limited area, 

* Chapter VI. 



Economical Consumption 71 

after cultivation has been carried to a certain point, to secure 
more products requires more rather than less proportionate 
labour. From the point of view of social cost it is obvious 
that increased consumption of articles of this sort is less advan- 
tageous than increased consumption of commodities whose 
cost decreases as the quantity produced grows. 

The point that it is important to note in connection with each 
of the applications of the law of least social cost that have been 
given, is that the reduction of cost which may be secured by a 
simple change of wants involves no corresponding reduction 
in the pleasures of consumption. Consumers continue to be 
as well off as before, while producers are better oft. Thus 
changes in wants may add to economic well-being just as 
effectively as changes in methods of production and are quite 
as worthy of the attention of economists. 

§ 42. The most obvious relation between consumption and Economic 
production grows out of the fact that consumers are also pro- „?,v"„ 

^ '=> 1. sunipLion 

ducers, and what they eat, drink, and wear, the houses they live 
in, and the amusements they enjoy, have a determining influ- 
ence on their efficiency. The ways in which different forms of 
consum.ption affect productive efficiency are more properly 
treated in the chapters on production. At this point attention 
will be called merely to the economy of different lines of ex- 
penditure, especially expenditures for food. 

Through careful experiments physiologists have ascertained 
with some degree of accuracy the amount of nutrition which 
the average man requires each day when engaged in different 
kinds of work. It is customary to express this as so many 
calories * of heat energy, including so many grammes of the 
indispensable protein or tissue-building compounds. Tlie daily 
allowance made for the average man at moderate muscular 
work by Professor Atwater, an American authority in this 
field of investigation, is 3500 calories, including at least 125 
grammes of protein compounds. Men at hard labour and ath- 
letes in training require more, while brain workers appear to 
require somewhat less. 

Having established a standard, the next step is to analyse 

*A calorie is the amount of heat energy required to raise one gram 
of water 1° Centigrade. 



Nutritive 
Value of 

Different 
I'oods 



Luxury 



72 The Consumption of Wealth 

different kinds of food to ascertain their nutritive value. Such 
analyses have now been made of more than two hundred of the 
different foods in ordinary use in the United States.* Eco- 
nomical consumption is secured when the cheapest combina- 
tion of foods containing the required ingredients and both 
palatable and digestible for the given consumer, is selected. 
No general rules can be laid down because of differences in 
the tastes and incomes of different consumers, but it is inter- 
esting to note the relation in which the food values of different 
foods stand to their cost. Professor Atwater has drawn up a 
tablet giving the quantity of each of several different kinds of 
food which might have been purchased for ten cents on a given 
day in New York City, and the amount of nutrition which each 
contained. From this it appears that from the point of view 
of protein contents the most economical foods were prepara- 
tions of wheat, corn, beans, oatmeal, beef for stewing, and salt 
cod, while from the point of view of potential heat energy the 
most economical were wheat flour, cornmeal, oatmeal, potatoes^ 
beans, salt pork, and sugar. The table seems, on the whole^ 
to bear out the common impression that a vegetable diet is much 
more economical than a diet consisting largely of meat, and that 
the cereals, wheat, com, beans, and oats, are the most eco- 
nomical of the vegetables. 

Science has, until recently, done very little to aid the ordinary 
man to direct his consumption wisely and economically^ 
although every investigation into the consuming habits of the 
poorer classes reveals the fact that, small as are their incomes, 
a considerable part is wasted because the most economical foods, 
clothing, etc., are not selected. The importance of this phase 
of domestic economics is now fully appreciated and there is 
every indication that rapid progress is being made, especiall)'- 
in the larger cities, towards making consumption economical. 

§ 43. Closely related to the question of economy in consump- 
tion is the question of luxury. As wealth is now distributed, 
the majority of families in every community must be eco- 
nomical in order to secure with their limited incomes the neces- 
saries and ordinary comforts of life. Contrasted with them 

*Cf. Atwater, Farmer's Bulletin, No. 142. 

f Idz'd., p. 40. 



Luxury 73 

are the smaller number of families whose incomes are large 
enough to permit the enjoyment of luxuries. The question 
whether under such circumstances expenditure for luxuries is 
defensible is a question of morals rather than of economics, 
but the economist may well be called upon to decide which of 
the possible uses of surplus income available for luxuries is 
calculated to contribute m,ost largely to the general well-being. 

To give precision to the discussion, luxuries may be defined 
as all economic goods which are not necessaries. The latter 
term includes not merely the food, clothing, and shelter neces- 
sary to life, but the entire complex of goods which each indus- 
trial class finds necessary to its industrial efficiency. The deci- 
sion as to what these goods are is not to be made by reference 
to any absolute standard, but through study of each class 
affected. For example, manual labourers in the United States 
would certainly include tobacco among the necessaries of life 
and the economist should include it also in discussing their 
problems, for the simple reason that the average manual 
labourer would continue to buy tobacco even though his earn- 
ings were too small to allow him to buy in addition goods indis- 
pensable to his industrial efficiency. Tobacco is to him a " con- 
ventional necessary." A formal definition of economic neces- 
saries would thus be : the things absolutely essential to the in- 
dustrial efficiency of the average family in the class considered, 
together with the things that are preferred above the absolute 
necessaries by the mem.ber of the family who directs its con- 
sumption. 

It is obvious from the above definition that failure on the Neces- 

part of any family to secure the necessaries of life is iniurious, ^/';V?^r"'' 
, . , -^ All before 

not only to it, but to the whole community. Under-consump- Luxuries 

tion means under-nutrition and loss in industrial efficiency. If ^°''' '^'^^ 
permitted to continue it must inevitably undermine the stand- 
ards which make a family self-supporting and self-sufficient 
and reduce its members to dependency. The general interest 
requires, therefore, acceptance of the maxim : the consumption 
of luxuries should be deferred until all are provided with neces- ■ 
saries. This is a moral principle that commends itself to all 
civilised communities and finds indirect expression in positive 
law. The obstacle to its practical application is the difficulty 



74 



The Consumption of Wealth 



The Point 
of View 



Fallacies 

Respecting 

Luxury 



of supplementing the incomes of independent families, when 
those incomes are insufficient, without undermining their in- 
dependence or permanently lowering their earning power. 
Among the measures that have been taken to surmount this 
obstacle are different plans of industrial insurance, by means of 
which the families of workingmen are assured necessaries in 
times of illness, and the erection of government employment 
establishments in which those in search of work may earn 
necessaries while they are looking for other positions. 

In the United States, in times of ordinary prosperity, all but 
the very lowest in the industrial scale have not only sufficient 
income to provide for necessaries, but some surplus income. 
Assuming that necessaries are assured to everyone, the question 
arises as to the use to which surplus income may most econom- 
ically be put. According to strict utilitarian doctrine — which 
is another name for economic morality — the happiness of any 
one person is just as important quantity for quantity and quality 
for quality as the happiness of any other, and hence surplus 
incomes should be used so as to add equally to the happiness of 
all. This suggests that no one is justified in spending income 
for a luxury for himself or his family which will afford less 
happiness than would the same income spent for a luxury for 
someone else or for some other family. The difficulty is that 
independent, self-respecting people do not want luxuries bought 
with other people's money. If the pleasures connected with 
economic goods are to be equalised it must be in some round- 
about way. Without trying to exhaust the subject a few words 
may be said about each of the ways in which surplus incomes 
are usually employed. 

Notwithstanding the denunciation of moralists it is still true 
that surplus incomes are largely expended on luxuries for the 
gratification of the spender himself, his family, or his imme- 
diate friends. In justification it is often urged by superficial 
observers that such expenditures " make work " for others and 
hence benefit them indirectly if not directly. This argument 
can be presented with a good deal of plausibility so long as only 
the one use of the income under consideration is thought of, 
A wealthy man gives an elaborate ball. In connection with it 
he employs decorators, caterers, waiters, etc. Those whom he 



Fallacies Respecting Luxury 75 

invites employ dressmakers, hairdressers, etc., in their prepa- 
rations for the event. The expenditure on the ball thus causes 
an active demand for labour of various kinds, which, but for 
the ball, would not have been required. Those who secure em- 
ployment certainly regard such an entertainment in the light of 
a blessing. But consider other uses to which the money spent 
upon the ball might have been devoted. Suppose that it had 
been given to a wisely administered charitable society for use 
in improving the condition of the poor. In such an event it 
would have been spent also largely for food, clothing, and per- 
sonal service, " making work " for numerous individuals who 
might otherwise have sought in vain for remunerative employ- 
ment. So far as its effect on the labour market as a whole is 
concerned it would certainly convey as much benefit in the 
second case as in the first. Similar results would follow its 
expenditure in any other rational way. Even if it were not 
spent at all, but allowed to accumulate as a deposit in a bank, 
there is reason to think that it would '" make work " for quite 
as many people as when used for the ball. Banks do not keep 
their funds in their vaults, but lend them out at interest to busi- 
ness men who employ them in connection with their businesses. 
This usually means buying materials, hiring workmen, etc., 
and has as favourable an effect on the labour market as luxur- 
ious expenditure. Unless, therefore, the transient pleasure of 
a few people who are already satiated with balls and similar 
diversions is to be esteemed above the lasting improvement of 
a great many people whose lives are all too bare of sunshine, 
the " make-work " argument can hardly be held to justify 
selfish luxury. The truth is that any rational mode of using 
income stimulates certain branches of industry and is to that 
extent beneficial to the small class of producers concerned. 
Money income represents an unassigned share in society's lim- 
ited store of economic goods. If that share is taken and con- 
sumed in a form that affords little happiness, society is so much 
the worse off than if it had been taken in a form that afforded 
much happiness. 

But, it should be added, there are luxuries and luxuries. Defensible 
Those who have large incomes to administer may contribute * ^ 
much to social progress by setting standards of rational enjoy- 



76 The Consumption of Wealth 

ment for others to imitate. The rich man who wishes to live 
in a grand way does the community Httle good if he buries him- 
self hke a hermit in an ugly palace. If, on the contrary, he 
builds a beautiful house to which a large and democratic circle 
of friends is welcome, he may do quite as much good as he 
could by giving his income in charity. 

Saving -us. § 44. A third use which many economists still urge as the 
Spending ■> \ j_ ^ • ^ , ■ , . . 

best to which surplus mcome may be put, is saving and invest- 
ment. In contrast to purely selfish luxury, saving deserves all 
of the praise it has received. Wise investment adds to society's 
material equipment of tools, machinery, buildings, etc., for 
the production of economic goods. Hence it lightens the toil 
necessary to the realisation of a certain productive result. 
Even more important is the fact that, through saving, a family 
may make itself economically independent, not in order that it 
may turn its attention from useful industry, but that it may 
devote itself to the work that most needs to be done even 
though the world has not yet learned to appreciate it and re- 
munerate it in proportion to its importance. 

It may be doubted whether, under present conditions, saving 
beyond what is necessary to assure economic independence ben- 
efits the world as much as would wise spending for some social 
object. Great wealth is almost if not quite as demoralising as 
great poverty, and the man who really desires to contribute to 
social improvement will put a check upon his accumulations 
and give his time and thought to spending such income as he 
does not require for his own family in ways that will benefit 
others. If he continues to save he must finally, in drafting his 
will, face the problem of the best use of wealth. Passing on 
to his heirs more than is necessary to insure them economic 
independence is merely evading an issue which each should 
face squarely for himself. 
Statistics of § 45. It is much easier to ascertain how men earn their in- 
tion comes and how much their incomes are, than how they spend 

them. In fact few families have very exact knowledge on the 
latter point themselves. They know how much they pay for 
house rent, perhaps how much they spend for coal and gas, but 
few keep accurate accounts of their expenditures for food, 
clothing, and the incidentals that are an important element in 



Consumption in the United States 77 

all but the humblest budgets. Nevertheless several useful in- 
vestigations into statistics of consumption have been made and 
certain general relations have been established. About the 
middle of the last century inquiries were made in Belgium and 
Saxony into the expenditures of different families, and upon 
them two economists, Ducpetiaux and Engel, based the follow- 
ing table showing the proportional expenditures of different 
classes for different purposes in the two countries : 





Table of Expenditures of 
Sdf-supporting- Middle-class 
Labourer'' s Family Family 


a 

Well-to-do 
Family 




in 


in 


in 


E 
Food, . 


elgium Saxony 


Saxony 

55^1 


Saxony 

18 

12 


Clothing, . 

Rent. . 


15 \^x% '^UsJ^ 

10 12 1 

5 J 5J 


12 j 


Fuel and light, 


5 J 


5 J 


Tools, etc. , . 


4 






Education, . 


2 2 


3-5 


5.5 


Taxation, . 


I I 


2 


3 


Care of health, 


I I 


2 


3 


Personal service 


> I I 


2.5 


3-5 



This table does little more than to confirm general observa- 
tion, but when it is considered how often general observation 
leads to false conclusions even such confirmation is of value. 
Wage-earners spend nearly all of their incomes in providing 
for the satisfaction of their merely physical wants. They have 
little left for the higher needs of their natures, and if these are 
to be cared for it must be through community action realising 
itself in free public schools, free playgrounds and parks^ free 
concerts, free lectures, etc. People in more comfortable cir- 
cumstances spend relatively less for food and relatively more 
for education and personal service. Expenditures for cloth- 
ing and rent show no diminution, probably because clothes and 
houses are regarded as marks of social position and .the desire 
for social esteem is so strong that a large part of surplus in- 
come is devoted to keeping up appearances. 

A more recent investigation into statistics of consumption Consump- 
was made by the United States Department of Labour to ascer- United *^* 
tain the importance of different kinds of commodities in the States 



yS The Consumption of Wealth 

everyday life of representative families. The results of this 
inquiry are summarised in the following table : 

Expenditures of Representative American Families* 
Percentage of Expenditure for 











Fuel and 


All Other 


Family Income 


Food 


Rent 


Clothing 


Lighting 


Purposes 


Under $200 


49.6 


15.5 


12.8 


8.1 


14.0 


$ 200-300 


44.3 


14-7 


14.3 


7-6 


ig.i 


300-400 


45-6 


I5-0 


14. 1 


7.0 


18.3 


400-500 


45.1 


15-3 


14.4 


6.6 


18.6 


500-600 


43.8 


15.2 


15-3 


6.6 


19. 1 


600-700 


41.2 


15.5 


15.9 


5-9 


21.5 


700-800 


38.9 


15.6 


16.3 


5.3 


239 


800-900 


33.1 


i6.i 


I5-I 


5-3 


25-4 


900-1000 


34-3 


149 


16.8 


4-7 


29-3 


lOOO-IIOO 


34-7 


I5-11 


17.5 


4-5 


28.2 


II00-I200 


30.7 


12,2 


i6.5 


3-9 


36.7 


1200 and over 


28.6 


12.6 


15.7 


3.0 


40.1 


All sizes 


41. 1 


15.1 


153 


5.9 


22.6 



This table is based on a study of as many as 2562 family 
budgets and is even more suggestive than the former because 
of its more careful classification of expenditures according to 
the family income. It indicates the same general relations. 
Expenditures for food diminish relatively as the family income 
grows, and the difference is made up by a relative increase in 
the expenditures for the satisfaction of other than merely 
physical wants. Expenditures for rent bear a fairly constant 
relation to the total income, while expenditures for clothing 
show a tendency to increase slightly. 
Family Other interesting inquiries into family expenditures recently 

^® made are referred to at the end of the chapter. That pub- 

lished under the title Family Budgets gives an account of the 
expenditures of typical working-class families in England, and 
is interesting because it emphasises the differences to be found 
in the consuming habits of families even in the same industrial 
and social class. This indicates that a very large number of 
budgets must be compared to prevent individual differences 
from giving a false bias to the investigation. 

There is perhaps no branch of economics so much in need 
• Seventh Annual Report of the Department of Labour, 1891, p. 864. 



Conclusion 79 

of development as that dealing with the statistics of consump- 
tion. A first step towards fuller knowledge in this department 
of the subject would be to induce representative families to 
keep accounts in accordance with some simple plan, so that in- 
formation might be obtained upon which to base statistical 
comparisons. Residents in Social Settlements may do useful 
work in this field by supplying their neighbours with handy 
account-books and directing them in keeping records of their 
expenditures. Such records would be valuable for compari- 
son with other calculations, and also the habit of keeping them 
would be found a help in determining how income might be 
best employed. 

§ 46. The subject of consumption may be looked at eco- Two 
nomically in two different ways. The more familiar way is to ConsuSp^ 
regard it as the goal of economic activity and to show how the tion 
desire for goods causes them to have value and price and in- 
duces people to engage in industrial pursuits. Though per- 
fectly valid as far as it goes, this aspect of consumption must ► 
not be exaggerated. The other way of looking at it is as a 
means of restoring energy. The consumption of goods neces- 
sary to efficiency is not merely an end ; it is a means to further 
production. Human beings are not mere goods-consuming 
automatons. They enjoy activity for its own sake, and the 
more highly developed they are, the more they are likely to look 
upon goods as means to the forms of activity they prefer, 
rather than as ends in themselves. Tt follows that desire for 
goods is only one, if the most important, of the motives which 
control the economic man. Desire for activity is another 
motive which in individual instances quite outweighs the de- 
sire for goods. 

At the present stage of human and social development the Conclusion 
former of the above ways of regarding consumption is believed 
to be the more accurate and helpful to an understanding of eco- 
nomic phenomena. The latter is, however, applicable already 
to many individuals and classes and must be kept in view in 
connection with all problems looking to the future. Economic 
phenomena are related not as cause and effect simply, but in a 
continuous circle of causation. Men produce, that is, expend 
energy, in order that they may consume; but they consume. 



8o The Consumption of Wealth 

that is, store up energy, in order that they may again plunge 
into the activities of production. The ideal round is one in 
which the pleasures of production are as definite and real as the 
pleasures of consumption. Unfortunately the conditions of 
production are still so arduous for the mass of men that work 
is usually entered upon unwillingly and only under the stimulus 
of the prospect of pay. In the thought of the average man 
consumption, or the desire to consume, thus stands as the 
motive for production. In the following chapters the point of 
view of the average man is accepted, and economic phenomena 
are explained by reference to it. The other point of view 
which finds work a joy, and goods merely aids to further work, 
receives attention in the closing chapter on Economic Progress. 

REFERENCES FOR COLLATERAL READING 

*Patten, The Consumption of Wealth, and Dynamic Economics ; 
Hearn, Plutology ; * Marshall, Principles of Economics, Book III.; 
Ely, Outlines of Economics, Book II., Part IV.; Mayo-Smttk, 
Statistics and Economics, Book I., Chap. II.; *Aiwater, Farmer's 
Bulletin, No. 142, published by the U. S. Department of Agri- 
culture ; Sixth and Seventh Annual Reports of the United States 
Department of Labour, 1890 and 1891 ; Family Budgets collected 
by the Economic Club of London, 1891-1894; *Ro'wntree, Poverty, 
a Study of Town Life, Chaps. VI., VII., and VIII.; *i^^//<?r. Prin- 
ciples of Economics, Chaps. 4 and 40. 



CHAPTER V 

VALUE AND PRICE 

§'47, As already explained, the term value is used in eco- 
nomics in two different senses, one subjective or pertaining to 
the relation between men and goods, and the other objective 
or pertaining to the relation between goods and goods. We 
will begin this chapter with an analysis of the principles which 
govern values in use, or values in the first sense, and consider 
then the relation between such values and the ratios at which 
goods exchange for each other, or values in the second sense. 

As a first illustration, consider the mental processes by which The Valua- 
a man living in isolation, like Robinson Crusoe on his island, Crusoe 
values some of his possessions, as, for example, tvv'cnty car- 
tridges he was able to save from the wreck together with his 
gun. These different cartridges may be put to uses as diverse 
as that of protecting their possessor from the attacks of hos- 
tile savages and that of supplying his table with small birds or 
squirrels. Each has a utility determined by the intensity of 
the want which it is to satisfy. In all probability Crusoe will 
decide to put aside a few cartridges with which to repel attack. 
He will wish to employ the others in the ways that will con- 
tribute most to his well-being. If there are deer upon the 
island it will be foolish for him to shoot his ammunition away 
at small game. Let us suppose that he makes up his mind to 
put aside six of the twenty cartridges and to use all the rest 
for deer shooting. If the herd is tame and he is a good shot, 
he may reasonably count on killing a deer with each cartridge, 
so the fourteen shells may represent in his calculations four- 
teen deer to be killed from time to time as he may require them. 
These will, as already explained, have an importance to him 
diminishing as the time to elapse before they are to be con- 
sumed is extended.* At the head of the list stands the deer 
* Chapter IV., Section 36. 
81 



82 Value and Price 

to be killed to furnish a steak for to-morrow's dinner, at the 
foot the last deer to be shot some three or four months hence. 
The latter seems of such slight importance at present that 
Crusoe may well hesitate between saving a shell for it and try- 
ing his hand on some of the smaller game on the island. 
There is thus a series of utilities corresponding to the differ- 
ent cartridges descending from the immense utilities of the 
cartridges that may save Crusoe's life to the small utility 
of that which is to supply his next quarter's venison. Under 
these circumstances what is the value to him of a single car- 
tridge ? If it were possible we might expect him to assign dif- 
ferent values to the different cartridges, but since they are all 
exactly alike tliis would be an absurdity. He must have one 
valuation that applies indifferently to each one of them. Will 
this value of a single cartridge be gauged by its ability to pre- 
serve his life or its ability to kill a deer for him three months 
hence ? 
Value To decide the above question it is only necessary to consider 

Depends on what Crusoe would lose if a cartridge were taken away. 
TT^^"^^ Clearly this loss would not put his life in jeopardy, as he 
would continue as before to save the half-dozen with which 



Utility 



to protect himself. As surely it would not deprive him of to- 
morrow's dinner. As a rational man he will shift it to the 
point where it will be felt least and forego, since he must forego 
something, the prospect of the fourteenth deer. It is, there- 
fore, his estimate of the utility of this least useful deer that 
gauges for him .the value of a single cartridge. This is what 
he loses if a single cartridge is lost; this is v^^hat he gains by 
having twenty cartridges instead of nineteen. It, accordingly, 
measures the importance or value in use of a cartridge to him. 
Generalising from this illustration and calling the least utility 
of a single unit of a commodity under given conditions of 
supply its marginal utility, we may formulate as a general law 
the principle that men value units of commodities in proportion 
to their marginal utilities. Value, in the first sense, is thus 
^ man's estimate of marginal utility. 
Valuations In the above statement it is the value of a single unit of a 
Units of commodity that is referred to rather than that of the corn- 
Commodity modity as a whole, and this corresponds to man's habitual mode 



Valuations Refer to Units of Commodity 83 

of making valuations. When iron is said to be less valuable 
than gold it is meant that a pound of iron is less important to 
man than a pound of gold. Every change in the supply of an 
economic good of course changes its marginal utility and 
therefore its value. This fact makes the value of a single unit 
multiplied by the available supply of 'units quite misleading as 
an index of total importance. Twenty times the small valua- 
tion Crusoe put on a single cartridge would by no means 
represent the value to him of the twenty cartridges, some of 
which were as precious as life itself. In the same way, multi- 
plying the slight value of a pound of iron by the number of 
pounds in existence would give a total representing very in- 
adequately the importance of iron to man. If an approximate 
notion of the importance of the total supply of a commodity is 
sought, the only way to proceed is to add together the utilities 
of all of the different units used by man. Such a calculation 
would show, of course, that such free goods as air and water 
are more important than even the most costly economic goods. 

In the above illustration an ability to gauge the utilities of Valuation 
different units of a good is assumed which would rarely be met ^^ ^ Crusoe 
with in practical life. Even a Crusoe with unlimited leisure mate only 
for the niceties of economic calculation would have to content 
himself with comparative rather than absolute estimates of the 
utilities of his different cartridges. He could say with con- 
fidence that the utilities of those necessary to protect his life 
were greater than of those to supply his table. He could also 
arrange the latter in a scale of diminishing utility depending 
on the game to be shot and the remoteness of the time when 
it was to be needed. His determination of the marginal utility 
which measures the value of a single unit would be only ap- 
proximate, however. It would be the utility of a fourteenth 
deer, not because he can tell just Vv^hat that utility is, but be- 
cause he knows that its utility is on the one hand less than that 
of the thirteenth deer to be shot with the next to the last car- 
tridge, and on the other greater than anything else which he 
eould secure with the fourteenth cartridge. Thus in all cal- - 
culations of value the determination of marginal utility is com- 
parative rather than absolute. 

§ 48. In the preceding section Crusoe's valuation of a com- 



84 



Value and Price 



Marginal 
Cost and 
Yaltxe 



modity which he could not reproduce upon his island was con- 
sidered. Much more frequent must have been his valuations 
of the goods which he could produce. Consider, for example, 
how he would value the arrows which he must whittle out 
laboriously as a means to procuring small game. Besides the 
utility of these arrows there would be in his mind vivid asso- 
ciations connected with the cost of making them. In fact until 
he became quite expert with the bow and could tell quite accu- 
rately what an arrow was worth to him in game, he probably 
valued his arrows in accordance with the labour they cost him. 
One arrow was v/orth perhaps an hour's labour. But an 
hour's labour, from the point of view of the sensations that ac- 
company it, may mean anything from the pleasurable activity 
of the first hour after a refreshing night's sleep, to the painful 
drudgery of the last hour of the day when all of the faculties 
are crying out for repose. According to which of these stand- 
ards is the importance of an hour's labour gauged ? As on in- 
quiring before which utility determines value, so now on in- 
quiring which disutility of those which stand for the different 
hours of work throughout the day determines cost, we must 
consider what Crusoe would gain if an hour's toil were spared 
him. Obviously, he would gain most by stopping work an 
hour earlier. It is the last hour of the day that involves most 
disagreeable effort or that has the greatest disutility. If an 
hour is to be cut off from the working day it is from this try- 
ing last hour that one would wish to be relieved. It stands in 
the mind for the cost of an hour's work, and in valuing an 
arrow according to its cost it is to it that Crusoe's thoughts 
would revert. If we call the disutility of this last hour the 
marginal disutility we may say that the value of a good, judged 
from the point of viezv of cost, is determined by the margined 
disutility of the labour time necessary to its production. Men 
who, like Robinson Crusoe, produce for themselves the things 
which they consume, may value their possessions either by 
reference to their marginal utilities or to the marginal disutili- 
ties of the labour involved in their production. It is hardly 
necessary to add that in practice the determination of the cost 
of an hour's labour is comparative rather than absolute, just as 
is the determination of the utility of the resulting good. 



Total Utility 



85 



Since the disutility of each hour's work is compensated by 
the utility of the product resulting from it, the tendency of the 
economic man is to continue his labour until the disutility it 
entails is just balanced by the utility it affords. Every addi- 
tion to his labour increases its disutility, every addition to the 
product, according to the familiar principle, diminishes its 
utility. At some point disutility will cease to be fully com- 
pensated for in utility, and at that point labour must stop if 
an economic loss is to be averted. 

§ 49. The contrast between pleasures and sacrifices indi- 
cated in the above analysis of value may be illustrated graphi- 
cally. Let distances along the line OX in the following figures Utility and 
represent either units of commodity or hours of labour, and '^" ^ ^ ^^ 
distances along the perpendicular line OY represent the utilities 
of these different units of commodity or the disutilities of the 
hours of labour. Erecting side by side on the line OX and 
parallel to the line OY narrow parallelogram.s representing the 
diminishing utilities uf the successive units of commodity re- 
salting from a day's work, we have the following figure : 



The 

Relation 

between 




The area of all these parallelograms taken together repre- 
sents the total utility of all of the products of the day's labour. 



86 



Value and Price 



and it will involve no very serious error to represent this total 
area as bounded by a curve extending from the Y axis to the 
parallel line representing the marginal utility produced during 
the day, as follows: 

Y 
A 



Total UmUy 



Fig. 2. 



c 



-X 



In a similar way narrow parallelograms representing the 
increasing disutilities of successive hours of work during the 
day may be erected side by side on the line OX and parallel to 
the line OY, giving the following figure: 

y 



.^ 



o 



1 2 



5 6 7 

Fig. 3. 



-X 



Relation between Utility and Disutility 87 

As before, this may be simplified by combining the narrow 
parallelograms into an irregular area bounded by a curve, as 
in Figpire 4 : 

X 




Fig. 4. 



If the exact equilibrium between marginal utility and mar- 
ginal disutility, which is the goal of economic conduct, is real- 
ised, the lines BC in Figures 2 and 4 are of the same length, 
and the figures may be superimposed as follows : 




Fig. s. 



88 



Value and Price 



Surplus 
Utility 



Marginal 
Utility and 
Value in 
Industrial 
Society 



Different 
Goods 
Valued by 
Different 
Classes 



The " surplus utilit}^ " area, A B D, in this figure represents 
the pleasure an isolated producer derives from the consump- 
tion of the fruits of his toil over and above that which com- 
pensates him for his sacrifices in production. From the point 
of view of economics, the existence of this surplus is what 
makes life worth living. 

§ 50* The valuations of a Crusoe are necessarily crude and 
inaccurate because he has only his own judgment and experi- 
ence to rely upon. In industrial society the valuations of each 
individual are supplemented and corrected by the valuations 
of other individuals. Judgments in regard to the importance 
or marginal utilities of different goods are collective or social 
and for this reason are more precise than they can be for men 
in isolation. 

The simplest case of social valuation is presented in connec- 
tion with a commodity like wheat flour, which serves a variety 
of uses in every household and the want for which on the part 
of the normal family is quite elastic. According to the 
familiar principle of diminishing utility each family's con- 
sumption of wheat flour may be arranged in a scale in which 
the high utilities of the more important units will come first 
and the low utilities of the less important units last. At the 
very end will stand the marginal utility of the least important 
unit consumed. As all families consume numerous units of 
wheat flour, and as this consumption is carried in most families 
not to the point of satiety, but only to the point at which the 
sacrifice involved in paying for additional units is not fully 
compensated by their utilities, all families value a unit of such 
flour approximately in proportion to its marginal utility to 
themselves. In this case all consumers contribute something 
towards the determination of the social valuation upon which 
depends the relative importance of a unit of wheat flour in 
comparison with units of other goods. 

Some readers may be inclined to question the correctness of 
the statement that few families carry their consumption of 
such a common article as wheat flour to the point of satiety. 
Certainly in the choice of their own food the rich do not hesi- 
tate, under present conditions, to use all the wheat flour in 
various forms for which they feel the slightest desire. It is 



Different Goods Valued by Different Classes 89 

in their purchases for their servants, if anywhere, that their 
consumption of such an article stops short of the point of 
satiety. In the case of an even cheaper commodity, like salt, 
the consumption of perhaps the majority of families in a 
modern community is unquestionably carried to the point of 
satiety. Such a commodity is not an object of painstaking' 
economy to the well-to-do, but virtually a free good. Its mar- 
ginal utility to the average family is a negligible quantity be- 
cause it is consumed as a matter of course down to the point 
of satiety. The value of such an article is determined by its 
marginal utility not to the well-to-do, but to the very poor, to 
whom even the small price of a bag of salt is a burden, and to 
those who use it in connection with industrial purposes 
(e g., in the salt-fish industry, in removing ice from the tracks 
of street railways, etc.). The value ascribed to it in these con- 
nections determines its importance in comparison with other 
commodities. In the same class as salt are matches and the 
other cheap articles which are consumed daily by rich and 
poor alike. Such articles are no longer objects of economy to 
the well-to-do, who pay for them what market conditions re- 
quire and would continue to buy the same quantities, that is, 
all they have any possible use for, even if the prices they had 
to pay were doubled or trebled. In such cases values, or the 
comparative importance of units of different goods, are deter- 
mined by the marginal utilities of single units of such goods, 
not to each individual consumer, but to consumers generally. 
Well-to-do consumers exert no influence because they con- 
sume all that they wish without reference to v/hat they must 
pay for such goods. This leaves the task of valuation to con- 
sumers who are less well off and to others who use the articles 
as materials for further production. 

A second characteristic of valuations in industrial society Valuation 
rests on the fact that most goods are not simple utilities, but '^^^^^^f^^^' 
bundles of utilities. A suit of clothes, for example, is not Complex 
merely a protection from cold and damp. The modern man 
pays for this utility in his clothes, but he pays much more for 
the comfort and elegance of the fit, the social distinction at- 
taching to the fineness of the goods, etc. Since valuation con- 
sists in ascribing importance to goods, in proportion to their 



90 Value and Price 

marginal utilities, it involves as many separate steps as there 
are separate utilities in the goods to be valued. Social valua- 
tion differs from that of a Crusoe in that these separate steps 
are taken by different classes in the community. In the case 
of clothes the well-to-do class which patronises fashionable 
tailors takes the warmth and comfort of its garments for 
granted. These utilities are required also by the less pros- 
perous classes in the ready-made clothes which they buy and 
are valued in this connection, or even, as regards warmth, by 
the still poorer classes who buy second-hand clothes. The 
patrons of fashionable tailors give their thought to deciding 
as to the marginal utility to them of the style of cut and dis- 
tinction of finish. Perhaps the best illustration of this point 
is presented in the valuation of watches of different grades. 
Nearly everyone wants one fairly accurate pocket timepiece 
and few have use for more than one. The money equivalent 
of the marginal utility of this primary quality in a watch is 
very great to the well-to-do classes, and if the value of this 
quality were fixed by them it would be represented by many 
dollars. But the conditions of production are now such that 
fairly good timekeepers are brought within the reach of all. 
The marginal utility which determines the value of this quality 
is therefore that to people in very moderate circumstances. 
The watches of the well-to-do have in addition to this primary 
requisite, durability, beauty, power to give social distinction to 
their owners, extreme accuracy as timekeepers, etc. It is 
these qualities that the well-to-do value according to their mar- 
ginal utilities to themselves rather than the primary quality 
common to all honest watches. The value of a watch is 
the sum of the values assigned to each one of its qualities by 
the classes to which these qualities stand as marginal utilities. 
As a timepiece it is valued by the people who can just afford 
to have a timepiece, as a durable timepiece it is valued by a 
higher class in the economic scale, as a durable timepiece en- 
cased in silver it is valued by those just able to have silver 
watches, as a gold-cased watch it is valued by people in still 
better circumstances, etc. In each instance the value ascribed 
to the quality added just before is carried over to make a part 
of the value of the watch to which still another quality has 



Valuation a Social Process 91 

been added. The value assigned to this last qualit)/ is added to 
the values previously determined to make the value of the 
whole watch. Thus the value of any good which is made up 
of a bundle of qualities is the result of a social rather than of 
an individual calculation of marginal utilities. 

The three illustrations that have been given are typical of Valuatioa 
the valuations that are made in industrial society. Use value ipi-J^*^ 
is still man's estimate of marginal utility. Not every man's I 
estimate, however, determines it, because in industrial society 
the valuations of individuals are influenced by those of other 
individuals with whom they come in contact. The value of 
each good depends upon its marginal utility to the group of 
consumers to whom it is an object of economy. If it is com- 
posite its value is the sum of the marginal utilities of its dif- 
. ferent qualities to the groups to which these qualities are 
objects of economy. Value in industrial society is thus the 
result of social valuation. It is not so m.uch man's estimate, 
as society's estimate of marginal utility. 

§ 51. In the economic calculations of a Crusoe, as we have Marginal 
seen, marginal disutility serves quite as readily as marginal v2ue^n 
utility as a gauge of the value of reproducible goods. Dis- Industrial 
istility or cost of production includes all of the painful and dis- ^^^^^ y 
agreeable sensations that men experience in connection with 
production. Each such sensation stands for a sacrifice and 
imless the results of production fully compensate all those who 
have made sacrifices it has entailed loss in well-being. So 
long as attention is confined to the production of a Crusoe the 
painfulness of prolonged efl^ort may stand by itself for these 
sacrifices, but for industrial society with its subdivision of 
functions a more precise analysis is necessary. In addition to \ 
the painfulness of effort is another sacrifice which we may 
describe as postponing consumption or waiting. This is in- j 
volved more or less in all branches of production. The work- 
man who labours only eight hours a day may not prolong his 
effort to a point where it is painful, but he is sure before the 
day is over to feel that he is making a great sacrifice in con- 
tinuing at his bench when he might be out in the street or at 
home with his family. Postponing consumption even until 
the whistle blows is one of his costs of production. But under 



92 



Value and Price 



Complica- 
tions in 
Calculation 

of Social 
Cost 



present conditions the postponement required is much longer 
than this. Modern production is indirect or roundabout. 
Materials, tools, machines, etc., are produced as aids to the 
production of consumable goods, and on the average a long 
period of waiting must intervene between the first steps in pro- 
duction and its issue in goods which are ready for consump- 
tion. The postponement of consumption which this entails is 
little appreciated by workmen. They experience the painful- 
ness of effort and they must perforce abstain from consump- 
tion during their working hours, but the conditions of their 
employment, as a rule, insure them their wages by the week or 
the month irrespective of the stage of completion of the goods 
which they help to produce; and the conditions of their lives, 
as a rule, cause them to spend these wages for consumable 
goods as soon or nearly as soon as they earn them. Postpon- 
ing consumption so that production may be carried on in a 
roundabout way is the function of capitalists. It is their 
wealth which is tied up in the form of the tools, machines, 
buildings, etc., indispensable to efficient production, and the 
sacrifices v/hich they make in permitting their incomes to take 
these forms rather than the form of consumable goods which 
they could immediately enjoy are as properly included in the 
costs of production as the sacrifices of workmen. 

Nor is the division of the sacrifices connected with produc- 
tion between workmen and capitalists the only complication to 
be considered in an analysis of costs. Production is co- 
operative and many men unite their efforts to effect the crea- 
tion of even the simplest good. It follows that the cost of 
production of each good is a surn of sacrifices to which many 
different individuals have contributed. Workmen of different 
grades and different capitalists, each contributing only a paft 
of the capital used, have a share in it. Moreover, since cost is 
at bottom a question of individual feeling, its amount depends 
quite as much on the character and circumstances of the pro- 
ducer as upon the productive act which he performs. As a 
rule those doing the same sort of work are sufficiently alike to 
make general statements in regard to the cost of that work 
admissible, but there are many productive services which are 
rendered by individuals belonging to quite different classes 



Complications in Calculation of Social Cost 93 

and whose costs are accordingly quite different. The most 
common causes of differences in costs are differences in 
wealth. Every increase in income brings with it the pos- 
sibility of increased enjoyment from consumption. The man 
who has only what he earns from day to day and who 
earns only enough to supply him with the requisites to 
decent living has little to tempt him from his work. If his 
daily round of tasks is painless it involves a minimum of 
sacrifice, as he has little to turn to outside of the factory. 
Give the same man an income from investments equal to 
what he earns by his work and the sacrifice involved in that 
work is increased. Increase his income from investments 
until he has enough to live on luxuriously without work- 
ing at all, and he is more likely than not to find the labour, 
which before was not felt to be a burden, so irksome and un- 
pleasant that he v/ill give it up entirely. The character of the 
work has not changed, but the circumstances of the man have, 
and as a result there is a multiplication of cost. In the higher 
grades of employment where men with independent means 
work at the same tasks with men who have no other sources 
of income, differences in costs are so common as to make 
general statements abovit costs hazardous. The most impor- 
tant instance of such differences is in connection with the 
service of postponing consumption, or waiting, rendered by the 
capitalist class. This class is composed of all sorts and condi- 
tions of men from millionaires to dollar-a-day labourers. 
Society values the services they render by reference not to the 
sacrifices that are involved for them individually in the accumu- 
lation of capital, but to the amount of capital they accumulate. 
The wage-earner's meagre savings assist production no more 
and are no more important dollar for dollar than the inherited 
millions of the idle rich. Where the same productive services 
involve different degrees of sacrifice for different producers, it 
is the sacrifice to marginal producers, or those whose sacrifice 
is greatest, that must be counted in the cost of production. 
This must be compensated by the utility of the product or it 
will not be incurred any more than will an uncompensated 
last hour's labour be performed by an isolated producer. The 
calculation of the cost of production in industrial society is 



94 



Value and Price 



Valuation 
of Comple" 
mentai*y 
Goods 



thus a very complex process, and any balancing of marginal 
cost or disutility against marginal utility must be roundabout 
and difficult of analysis. 

The above discussion of the relation between cost and value 
in industrial society is intended rather to suggest than to solve 
difficulties. It touches upon som.e of the most intricate prob- 
lems of advanced economics and cannot be pursued further 
virithout the fuller knowledge of industrial relations which the 
following chapters attempt to supply. On the basis of this 
knowledge the topic is taken up again in Chapter XVI. and 
some conclusions are suggested which, it is hoped, may en- 
courage a more profound study of the subject. 

§ 52. A special case of valuation of the greatest importance 
is that of complementary goods. Many wants are satisfied not 
by one good but by a complementary group of goods, the ab- 
sence of any element in which would be fatal to the result. 
In such a case the whole group is valued as a unit in accord- 
ance with the principles just explained; and the valuation of 
each good in the group is the result of a separate calcula- 
tion. 

An illustration is furnished by Crusoe's gun and cartridges. 
Without the cartridges the gun is valueless, without the gun 
the cartridges are of no use. In this case if Crusoe wishes to 
put a value on either he must ascribe to it all of the impor- 
tance that belongs to both. In industrial society comple- 
mentary goods have, as a rule, independent uses to which they 
may be applied. In the case of a gun and cartridges, the 
latter, at least, or their component parts, may be turned to 
other purposes. This opportunity for independent use fur- 
nishes grounds for independent valuation and makes it pos- 
sible to calculate by a process of subtraction the value of the 
good which is useful only in the complementary group. The 
value of the whole group is measured by its marginal utility. 
The values of the elements in the group which serve other pur- 
poses are determined by their marginal utilities in these inde- 
pendent uses. The difference between the value of the whole 
group and the sura of these independent values is properly as-' 
cribed to the element or elements which are of use only in the 
group. If the group is made up of several elements, the 



Valuation of Complementary Goods 95 

process of valuation may be exceedingly complex in practice, 
but the considerations involved are readily understood. 

The most familiar complementary groups that men have Factors Id 
occasion to value are those made up of producers' goods. As are°Comple' 
production is now carried on every step in the productive mentary 
process involves the co-operation of several complementary ° ^ 
factors. The value of each group of factors is derived from 
that of the consumable goods which it is helping to produce. 
The latter satisfy wants directly and may be valued by refer- 
ence to the intensities of these wants. Groups of producers' 
goods do not satisfy wants directly and owe the importance or 
value ascribed to them to the part they play in the production 
of consumable goods. Although a derived value, the valua- 
tion of complementary groups of producers' goods obeys the 
same principles that apply to groups of consumable goods. 
The value of the whole group is calculated by reference to the 
value of the consumable goods to result from it. The values 
of different elements in the group are determined as far as 
possible by reference to the independent uses to which they 
may be put. The value of the whole less the values assigned 
independently to the elements for which there are other uses 
is the value to be ascribed to the element or elements that have 
no independent uses. In practice these calculations are often 
very complex and could hardly be made at all but for the inter- 
mediation of money, the common medium in which they are 
all expressed by the business community. 

§53. As already explained,^ the calculations in reference to Values in 
marginal utilities upon which values in use depend are com- ^ ? ^°^ 
parative rather than absolute. They attain precision only Exchange 
when there are a number of different goods to be valued and 
the consumer is given a choice between additional units of one 
or the other of them. In such cases marginal utilities must be 
carefully balanced against each other if an unwise selection is 
to be avoided. The typical consumer of industrial society is 
an individual with numerous and varied wants having access 
to markets in which numerous and varied goods capable of 
•satisfying these wants are offered for sale, but limited in his 
means so that many of his wants must go unsatisfied. Suc- 
cessive units of each particular good offered for sale obey the 



96 



Value and Price 



Values m 
Exchange 
Expressed 
as Prices 



Exchange 
Values 
Cannot 
Increase or 
Decrease as 
a whole 



law of diminishing utility. In order to get the largest return 
from the expenditure of his limited means the consumer must 
consider the law of variety. He must not buy an additional 
unit of one good when a unit of some other good which may 
be had at the same price has greater utility. In general he 
should carry his purchases of units of different goods which 
he desires down to the point at which the returns in utility for 
his last units of expenditure are approximately the same all 
along the line. Only under these conditions is he getting the 
largest possible return in utility for his expenditures. Econo- 
mists sometimes speak of the marginal utilities of all of the 
goods which a person consumes as determining the location of 
his margin of consumption. This margin should be as even 
as possible to insure the maximum return in satisfaction to the 
consumer with limited means. 

The balancing against each other of the marginal utiUties 
of different goods is one of the chief factors which deter- 
mine the ratios at which such goods exchange for each other, 
or exchange values. The practice of exchanging goods for 
money is now so universal that exchange values are habitually 
written with a sum of money as an intermediate term. Busi- 
ness men do not compare commodities by saying that so much 
of one exchanges for so much of the other, but by noting their 
prices. They do not say, for example, that a bushel of wheat 
is the equivalent of two bushels of corn, but that the price of 
wheat is one dollar a bushel and of corn fifty cents. In con- 
formity with this practice the discussion of the circumstances 
determining exchange values which follows is couched in 
terms of prices. 

The first principle in reference to exchange values that must 
be emphasised is that as ratios they can neither rise nor fall as 
a whole. Values in use, determined as they are by marginal 
utilities, may increase, but values in exchange cannot. A 
change in the exchange value of a particular good always and 
necessarily involves complementary changes in the exchange 
values of other goods. For example, if the exchange value of 
a bushel of vvheat increases from x to 2.^% the exchange value 
of X has diminished from one bushel of wheat to one-half a 
bushel of wheat. Exchange values as a whole cannot be said 



The Value of Money 97 

to hav€ changed at all. It is equally important to note that 
the exchange value of money, in which prices are expressed, 
may increase or decrease like the exchange value of any other 
individual good. When the exchange value of money in- 
creases prices fall, when it decreases prices rise. As prices are 
the barometer which guides business men in all their transac- 
tions it is of the greatest importance that that commodity 
should be selected to serve as money which is least likely to 
fluctuate in its exchange value. 

§ 54. The value of a unit of money or of a dollar, like the The Value 
value of anything else, is man's estimate of its marginal utility, f ^""^^ 
This is identical with the marginal utilities of the goods a dol- 
lar will buy. Each man has a certain money income to ex- 
pend and a certain scale of wants to satisfy. His effort is to 
get the largest possible return for his outlay. To accomplish 
this he must consider the prices of things quite as much as 
their utilities. His first dollar should go for that combina- 
tion of goods having the greatest utility, his second for a some- 
what less needed combination, and so on, each dollar adding 
somewhat less to his store of utilities than its predecessor. 
The marginal utilities of the goods purchased with his last \ 
available dollar measure the value of a dollar. It is these 
goods that the additional dollar adds to his store ; take the dol- 
lar away and it is these goods that he will forego. They 
measure the importance or value of a single dollar in his scale 
of living. 

Few people, even among those who regularly spend their Influences 
entire incomes in the satisfaction of their wants, estimate the Affecting It 
value of a dollar as rigidly as the above analysis implies, and 
yet everyone has as a result of his business experience a pretty 
accurate notion of the value of the monetary unit. If parents 
sometimes complain that their children are without such a 
conception, it is a proof simply that conditions have changed 
since they were young and that the value of a dollar to their 
children is actually less than to themselves. In the minds of 
educated men the value of a dollar includes not merely the 
utilities of consumable goods, but leisure for enjoyment, social 
esteem and influence, the perpetuation of the family name and 
family traditions, ever}4hing, in short, which command over 



98 



Value and Price 



The Deter- 
mination of 
Prices 



Buyers' 
Calcula- 
tions 



dollars may secure and which seems to them desirable. It is 
probably true also that some people worship dollars in a quite 
irrational way for their own sake, though misers who have 
no ulterior motive beyond hoarding up money are more com- 
mon in fiction than in real life. 

For convenience of analysis it will be assumed in the fol- 
lowing chapters that the exchange value of money, that is, the 
quantity of commodities generally which it can command in 
the markets of the country, is invariable. This is not quite 
true in practice, as is fully explained in Chapter XIX., but it 
is so nearly true over short periods of time that no serious 
error is involved in the assumption. 

§ 55. The circumstances that at last analysis determine the 
money prices of goods and services are exceedingly complex. 
To understand them it is necessary to comprehend every phe- 
nomenon of economic life. Nevertheless the actual process 
by which money prices are fixed is comparatively simple. 
Buyers and sellers come together each with definite notions as 
to what the prices should be, and the prices finally fixed are 
the result of their bargaining. 

On the side of buyers the following calculations are com- 
monly made : ( i ) They decide in regard to the values in use 
of the different goods offered for sale, and if they think of get- 
ting more than a single unit of each good they consider the 
values of additional units. In this connection, as already ex- 
plained, marginal utilities are decisive. (2) They decide as 
to the prices that they are willing to pay. As regards most 
of the goods purchased there is no hesitation. Experience has 
taught that at the prices at which they may ordinarily be pur- 
chased they afford the greatest return in satisfaction to be de- 
rived from the expenditure necessary to such purchase. Thus 
the normal family purchases flour, sugar, and the other staples 
that enter into the consumption of every household as a matter 
of course. Deliberation begins only after these necessaries are 
secured, and the question is how to get the largest return for 
the sum that remains to be expended. Buyers vary greatly in 
the intelligence they show in disposing of their surplus in- 
comes. Some expend them regularly for goods which they 
do not really want, but which attract by their novelty. Less 



Four Possible Gases 99 

impulsive buyers have in mind several different goods which 
tliey would like to have. These are arranged in their minds 
in a rough scale which enables them to decide promptly which 
of two goods they would prefer at the same price, or whether 
at different prices the dearer good is worth, in their scale of 
consumption, the difference. In all of these calculations the 
value they ascribe to the monetary unit is quite as important 
in directing their purchases as the values they ascribe to the 
goods bought. 

The calculations of sellers are usually somewhat more accu- Sellers'Ca^ 
rate than those of buyers. ( i ) They know pretty closely how ^^ ations 
much the goods they have to sell have cost them in money., 
This we will refer to in future as the expense of production.: 
Since they are in business for profit, sellers look upon the ex- 
pense of producing a unit of commodity as a minimum price,; 
less than which they cannot afford to take except underj 
unusual circumstances. (2) They have accurate information 
in regard to the current prices of goods and on the basis of 
this knowledge decide what prices they ought to obtain. Atl 
this point sellers are influenced by standards made for them 1 
by market and other social conditions, just as buyers are in- 
fluenced to a certain extent by the standards of others in cal- 
culating the values in use of different goods. 

There are four possible situations in which buyers and Fo^. 

sellers may come together. The simplest is that in which one cases : 

buyer bargains with one seller to secure a commodity which One Buyer 

that seller alone offers for sale. The buyer has made up his Seller 

mind what price he will pay rather than not get the commodity, 

but as an economic man he wishes to pay as much less as is 

consistent with his sense of fair dealing. On the seller's side 

is a definite idea of the lowest price he can afford to accept, but 

his business interest calls for the highest price he can get. 

If the buyer's maximum price does not exceed the seller's 

minimum price it is obvious that no exchange can take place. 

If it does, then the market price must lie somewhere between 

these limits. Just where depends upon the relative skill of the 

two parties in bargaining. 

A second and more common situation is that in which sev- Several 

Huyers and 

eral buyers bargain with one seller who has a monopoly of the One Seller 



icx) Value and Price 

good which all the buyers want. This situation admits of a 
variety of accompanying circumstances : ( i ) The monopolist 
seller may have only one unit of the desired good, as is often 
the case with dealers in antiques. In such a case the buyer 
who is prepared to pay the highest price will get the coveted 
object at a price between that offered by the next highest 
bidder and his own maximum price unless, indeed, the latter 
is less than the dealer is willing to accept. How this works 
out in practice is so frequently illustrated at auctions that 
there is no need to enlarge upon it (2) The monopolist seller 
may have several units of the desired good and these may be 
incapable of reproduction. In this case he may pursue the 
plan of getting as much as he can for each unit as it is sold, 
as is usual at auctions, or of marking each with the highest 
price which he thinks he can get for all of them, as is 
usual with " one-price " dealers in antiques. If he pursues 
tlie first course the result will be similar to that in the first case. 
Each successive unit will go to the competitor who was just 
■outbid by the more eager buyer vu^ho got the one before. In 
this case the prices received for different units will vary widely 
and if all are sold at one time will show a tendency to decline. 
If the seller pursues the latter course and uses good judgment 
in marking his wares he will fix on the price which is just 
equal to the maximum which the buyer vvfhose purchase is 
necessary to the sale of the entire supply is willing to pay, un- 
less, of course, this is below the price which he is himself willing 
to accept, when some of the supply must remain on his hands. 
(3) The monopolist seller may have several units of the 
desired good and may be in a position to produce as many more 
units as he considers it profitable to put upon the market. 
This is the common case of monopoly and is so important that 
special chapters are devoted to it. At this point it will suffice 
to submit the fairly obvious propositions that anywhere be- 
low the limit fixed by the maxim.um price which the most 
eager buyer is willing to pay, the monopolist may fix the price 
"by regulating the supply, and that, in so regulating the supply, 
lie will try to fix the price that will afford him the largest 
monopoly profit over and above his expenses of production. 
A third situation is presented when one buyer bargains with 



Two-sided Competition loi 

several competing sellers. Perhaps the most common case of One Buyer 

this kind is when a single city family goes in the summer to sellars 

live in a country district where all other families produce for 

themselves all of the milk, butter, eggs, chickens, etc., which 

they require. Under such circumstances, if competition is 

permitted to work out its full effects, the new family may get 

the country products it requires for the lowest prices the most 

eager sellers competent to supply all its needs are willing to 

accept. More frequently competition is restrained by custom 

and the buyer has a choice betv/een goods of different quality 

rather than between different prices for the sam.e goods. This 

third case of " buyers' monopoly " has resulted at times from 

the formation of the trusts discussed in Chapter XXV. 

When all of the manufacturers who use a particular kind of 

raw material combine, producers of the raw material are placed 

at a great disadvantage in bargaining. They may be forced 

to accept a price which is so low as to drive all but the most 

capable of them out of business. 

§ 56. The last and most common situation is that in which Two-sided 
there are several buyers and several sellers, between whom more ^^^^ ^ 
or less active competition and bargaining are carried on. In 
highly organised industrial centres this competition shows 
itself more clearly on the side of sellers than upon that of 
buyers, and in fact in most branches of trade sellers have 
adopted the plan of marking prices, leaving it to buyers to ac- 
cept them or reject them as they see fit. This arrangement 
does not dispense with buyers' competition as an active force 
in the determination of prices, since this is one of the chief 
factors that sellers consider in deciding what they shall ask 
for their wares, but it makes the whole process more 
complicated. 

In order to bring out the various influences at work under An 
conditions of two-sided competition, we will examine the case 
of an auction sale in which an auctioneer has identical goods, 
bicycles we will say, belonging to different sellers and is in- 
structed to sell as many of them as he can at the highest price 
he can get, each seller naming the minimum price which he is 
willing to accept for his wheel. Assume that there are six 
wheels and that the sellers' minimum prices are $20, $22, $24, 



I02 Value and Price 

$25, $27, and $30, respectively. Among the many would-be 
buyers at the auction the six who are prepared to pay the 
highest prices for wheels have in mind as their maximum 
prices $40, $35, $32, $30, $28, and $25, respectively. Each 
buyer understands the conditions of the sale and, as one wheel 
is like another to him, will be inclined to hold back in his bid- 
ding with a view to buying at a low price. All six of them 
are willing to pay $25, but at this price only four of the wheels- 
can be purchased, and fear of not getting any wheel at all will 
lead one of them to bid $26. At this price five would be will- 
ing to buy, but only four wheels are salable. One buyer must 
bid more or lose his chance to buy, so $27 will be offered. At 
this price five wheels may be sold to the five buyers willing to 
take them, but if the auctioneer is properly mindful of the 
interests of his customers he will try to get still more. If he 
succeeds in forcing the bid up to $28 there will still be five 
buyers for the five wheels he is authorised to sell. Any price 
between $27 and $28 will effect the sale of his five wheels, and 
since the sixth buyer will pay only $25, while the sixth seller 
will not take less than $30, only five wheels can change hands 
under the given conditions. The price between $27 and $28 
is therefore the one most satisfactory to buyers and sellers as 
a whole, and the one which competition, restrained by the 
self-interest of competitors, tends to establish. 
The Actnal Artificial though the above illustration is, it comes close to 
representing the forces which determine competitive prices 
generally. Rival sellers do not entrust their goods to an 
auctioneer, but they act jointly very much as he acted in the 
assumed case. Each has a minimum price determined by his 
expenses of production. All wish the largest number of sales 
at the highest attainable price. Their tendency as individuals 
is to put up the price. As competitors they tend to lower it 
to enlarge the volume of their sales. If competition is active 
between a number of sellers with varying expenses of produc- 
tion, the price is likely to be fixed at a point which affords 
profits to several, just pays the expenses of production of 
others, and drives others out of business because it does not 
cover their expenses of production. The part which buyers 
play in bringing about this result is to seek constantly for 



The One-price System 103 

the cheapest market. Their competition is rarely actuall}'^ 
excited, as was assumed at the bicycle auction, but its poten- 
tial force is indicated to sellers by the rapidity with which ' ' 
their goods are sold at the prices which they fix. The more 
attentive buyers are to their interests in getting goods at the 
lowest prices, the more likely are sellers to meet price-reduc- 
tions promptly, so that there will be substantially one price for 
each particular good at any one time throughout the whole 
market. The price will be lower than many buyers stood will- 
ing to pay, it will just about suit the ideas of others, while still 
others will find it too high. 

In assuming that two-sided competition will tend to estab- The 
lish one uniform price instead of a variety of prices for identi- sysTern^^ 
cal units of the goods sold, we are simply stating a fact ofj 
common observation in highly organised markets. Experi- 
ence has taught both buyers and sellers the advantage of agree- 
ing upon the one price at which a maximum number of sales 
may be effected, and all the machinery of competition, pub- 
lished price lists, clearly marked prices on goods offered for 
sale, etc., is designed to bring this about. Only in communi- 
ties in a backward condition industrially, as in Italy for 
example, do any large number of sellers at retail continue to 
make the determination of the price at which each good shall 
be sold a matter for a special bargain. The time that is wasted 
in consequence in useless higgling is convincing proof of the 
superiority of the one-price system. In the wholesale trade 
special bargains between the wholesale dealer and his influen- 
tial customers are more common and skill in bargaining is an 
important requisite to success. The price limats within which 
such bargaining is confined are, however, narrow, and the 
wholesaler is always restrained from making too great conces- 
sions by the fear that he may alienate his other customers. 

Generalising on what has been said, we may conclude that 
two-sided competition and bargaining between buyers and 
sellers tend to establish one price or a narrow range of prices 
for each good and that this corresponds to the money equiva- 
lent of the marginal utility of the good to the buyer who is just 
induced to buy and to the expense of production of the seller 
whose supply is necessary along with the supplies of sellers 



104 



Value and Price 



Market 
Prices 



Normal 
Prices 



Summary 



who produce more cheaply to satisfy the demand of the 
market. 

§ 57. A study of the four possible modes of price formation 
indicates that the money equivalents of the marginal utilities 
of the goods offered for sale to those whom we may style the 
marginal buyers, that is, buyers who are just induced to buy, 
always have an important influence upon prices. In case there 
is only a limited number of units of the good in existence or 
its production is controlled by a monopoly, these marginal utili- 
ties, which are themselves influenced by the number of units 
offered for sale, or by supply, determine the price. In the case 
of freely reproducible goods the money equivalents of their 
marginal utilities to marginal buyers are one of the determi- 
nants of prices, while the expenses of production to marginal 
sellers are the other. In this case no very definite conclusion 
can be reached in regard to prices until the circumstances de- 
termining the normal expenses of production have been 
considered. 

In the foregoing analysis market prices have alone been re- 
ferred to. In connection with most goods there is behind the 
fluctuating market price a normal price to which the former 
tends to conform. This is because the conditions of produc- 
tion are more stable than the market conditions under which 
goods are bought and sold, and serve constantly to recall prices 
from the more or less violent fluctuations of the market. For 
I the present, normal prices may be defined simply as the prices 
\ about which market prices tend to fluctuate. In the case of 
freely reproducible goods normal prices correspond to the nor- 
mal expenses of production of representative firms. The nor- 
mal prices of goods produced under conditions of monopoly 
are, on the other hand, the money prices which are calculated, 
in the long run, to afford the largest profit to the producer or 
combination of producers which enjoys the m.onopoly. In 
both cases the term, " nonnal," designates the price which 
economic forces tend to establish under the given conditions. 
The justification and practical usefulness of the conception 
will be made to appear in subsequent chapters. 

§ 58, This chapter has attempted to explain how the values 
and prices of goods are determined. It has been shown that 



Summary 105 

an isolated individual tends to value his possessions in pro- 
portion to their marginal utilities and that the latter depend 
partly upon his scale of wants and partly upon his supply of 
units of the good valued. A substitute basis for valuation in 
cases where the goods are produced as well as used was found 
in marginal cost, or disutility. The rational ordering of life 
causes the marginal utility, which is one measure of value, to 
just equal and offset the marginal disutility, which is the other. 
Only when this is the case, as was pointed out, can an economic 
equilibrium be realised. In industrial society complications 
are encountered. Although still referred to marginal utility, 
value was found to result from the joint calculations of differ- 
ent groups of people rather than from the calculations of single 
individuals. It was finally characterised as society's estimate 
of marginal utility. The complications on the side of cost 
were found to be even more serious. The costs incurred as 
production is carried on in society are divided up among a 
number of co-operating producers. No one producer, conse- 
quently, is able to judge what the total cost of production is. 
Even if the cost could be readily measured there is no direct 
opportunity to compare it with utility, as men usually produce 
for others rather than for themselves. Valuations based on 
marginal costs apply, therefore, to different goods from those 
that are valued by reference to their marginal utilities. 
Finally, it was shown that the costs of production are borne by 
men in very different circumstances, so that very different costs 
enter into the production of identical goods and services. As 
these have the same values, costs to men at the margin are 
alone influential in their determination. No attempt was 
made to clear up these difficulties, but it was intimated that in 
spite of them cost does influence value even in industrial 
society. The discussion of value concluded with some con- 
siderations bearing on the valuation of complementar}'- goods. 
Attention was then directed to the nature of price and to the 
circumstances determining the value of money. The four 
possible situations under which prices may be determined were 
described and discussed and finally the distinction between 
market and normal prices was explained. 

As has been indicated at every point in this chapter, one Conclusioa 



io6 Value and Price 

factor in the determination of the values and prices of goods is 
the available supply. In general, in accordance with the law 
of demand, an increase in the supply of a good means a fall in 
its marginal utility, or value in use, and a corresponding fall in 
its price. Conversely a decrease in supply means a rise in 
value and price. Ordinarily the amount of the supply of a 
good depends upon the conditions of production. In a some- 
what less direct but no less vital way it depends also upon the 
conditions of distribution. It is for this reason that the treat- 
ment of value and price in this chapter is left incomplete until 
the subjects of production and distribution have been con- 
sidered. 

REFERENCES FOR COLLATERAL READING 

* Marshall, Principles of Economics, Book V.; *Pierson, Principles of 
Economics, Parti., Chap. I.; Clark, Philosophy of Wealth, Chaps. 
V. and VI.; Smart, Introduction to the Theory of Value; *Bdkm- 
Bawerk, Positive Theory of Capital, Book III.; * Fetter, Principles 
of Economics, Chap. 5; * Carver, The Distribution of Wealth, 
Chap. I 



CHAPTER VI 
PRODUCTION: LAND AND NATURAL FORCES 

§ 59. Production has already been defined as the creation Productioa 
of utiHties. That man cannot create matter is a famihar truth. Dinned 
All that he can do is to rearrange particles of matter so as to 
create form utilities ; or move goods from one part of the world 
to another so as to create place utilities ; or preserve goods 
from one period to another so as to create time utilities; or, 
finally, transfer goods from the ownership of one individual 
to that of another so as to create possession utilities. Any i 
activity which contributes to the creation of utilities in either j 
of these ways is production. 

A school of French economists of the eighteenth century, the Manufac ^ 
Physiocrats, gave currency to the belief that agriculture is pro- Tradfng'a's 
ductive in a special and peculiar sense. They even went so far Productive 
as to characterise manufacturing and mercantile pursuits as ^^^.q "^ 
sterile or unproductive. Adam Smith took vigorous exception 
to the latter view, but he, too, speaks of nature as " labouring 
along with man " in farming, and implies, erroneously, that 
man has little outside help in his other occupations. Completer 
knowledge of the real nature of production has emancipated 
most minds from these misconceptions. They reappear from 
time to time, however, in criticisms of the activity of merchants, 
who are said to create nothing, but to live, like parasites, by 
buying things for less and selling them for more than they 
are worth. The obvious reply to such attacks is that mer- 
chants create time, place, and possession utilities and that 
human well-being depends as much upon these as upon 
form UtiHties. Convincing proof of the value of the services 
of merchants is furnished to city people when they go to live 
in the country in the summer and have to depend for the 
goods they require upon a distant and ill-stocked country 
store. The growing prevalence among country people of the 

107 



io8 Production : Land and Natural Forces 



Factors in 
Produc- 
tion: Na- 
ture and 
Man 



Capital 



The 

Productive- 
ness of 
Land 



practice of coming to town to do their shopping indicates, ore 
the other hand, their practical appreciation of what the mer- 
chant does for the community. If there is just ground for 
complaint, it is not because merchants fail to render useful 
service, but because the organisation of wholesale and retail 
trade is less economical than it might be. In this department 
of business the results of unregulated competition are less 
clearly beneficial than in, perhaps, any other, 

§ 60. As already implied, there are two essential factors 
in all productive processes : nature and man. Nature figures in 
production as an aggregate of materials and blind forces. Act- 
ing in conformity with invariable laws, she destroys as readily 
as she creates. Moreover, her productive services are always 
gratuitous to him who has the intelligence to command them. 
Man, on the contrary, appears as a being with conscious pur- 
pose. He also destroys, not ruthlessly, however, as nature seems 
to do, but in order to satisfy his wants. In production man is 
the directing, active agent, nature the obedient, passive agency. 
Man marshals the materials and productive forces which 
nature supplies in the ways that experience has taught him to 
be best, and he alone enjoys the fruits of productive enterprise. 

Man and nature are the primary factors in production; 
secondary or derived from them is capital, the products of past 
industry used as aids to further production. After what has 
been said of the revolution which followed the introduction of 
power machinery and other forms of capital there is little 
need to emphasise the importance of this third factor in produc- 
tion. To capital is chiefly due the efficiency of contemporary 
productive methods, as contrasted with those of one hundred 
and fifty years ago, and also the division of the working popu- 
lation into employers and employees. These truths are so 
familiar to everyone that it is not so much the importance of 
capital as the fact that it is itself dependent upon man that 
requires emphasis. 

§ 61. As the term is commonly used in economics, "land" 
designates not only the surface of the earth and the materials 
above and beneath it, but also bodies of water and what they 
contain. The principal ways in which land, in this sense, 
assists in production may be enumerated as follows: (i) It 



Progress in Production 109 

affords support for man and the buildings, etc., he erects upon 
it; (2) its extension permits the movement of men and goods 
from place to place ; ( 3 ) its geographical features, mountains, 
valleys, rivers, bays, etc., aid in many ways; (4) it supplies 
the materials, mineral, vegetable, and animal, from which all 
commodities are m^ade; (5) each portion of it enjoys its share 
of summer's heat and winter's cold, air, sunshine, and rain, 
without which no form of life could long continue on the 
earth. Properly speaking some of these endowments of land, 
such as heat and sunlight, are forces rather than materials. 
The principal other natural forces which aid in production, as 
at present carried on, are the force of gravity, the vital forces 
that cause the growth of plants and animals, the expansive 
force of steam, and electrical force. 

Land and natural forces have been available for human use Progress in 
for one hundred thousand years or more, but only in recent 
times has man begun to appreciate and utilise them at all fully. 
His early discoveries of fire and its uses, of methods of navi- 
gating by water and of the metals, and his first domestication 
of animals and cultivation of plants, followed each other at 
long intervals and were the results, there is reason to suppose, 
of happy accident rather than of deliberate study and experi- 
ment. Only in the last two centuries has systematic progress \ 
been made in the task of understanding nature and directing 
her forces toward human ends. The results already achieved 
in analysing materials into their elem.ents and gauging accu- 
rately their importance for different uses, in generating and 
controlling steam and electricity, and in finding new employ- 
ments for these and other natural forces, seem to justify ex- 
tremely optimistic anticipations in regard to the future of the 
race upon the earth. They have served in large measure to 
shift the attention of economists from the problems of produc- 
tion, which seem, in process of such happy solution, to the 
problems of distribution, which become more rather than 
less complex as general wealth increases. There is the 
more excuse for this shifting of interest because different 
phases of production are beginning to be dealt with in 
special treatises. " Economic geography " is a description of 
the part which land and natural forces play in production. 



no Production: Land and Natural Forces 



Different 
Character- 
istics of 
Different 
Pieces of 
Laad 



" Economic geology " treats more especially of rocks and 
minerals in relation to human well-being. Similarly, treatises 
on agriculture, on mining, and on different kinds of manu- 
facturing, describe the technique of modern production in its 
different branches. It remains for a treatise on economics 
merely to emphasise the more general aspects of the part that 
nature plays in production. 

§ 62. It is a familiar fact that dift'erent areas of land are 
unequally fitted to aid production in the ways that have been 
described. Most obvious are dift'erences in geographical 
features. There is but one New York Harbour on the Ameri- 
can Continent, and its superiority in all essential respects to 
other harbours causes every square foot adjacent to it to be 
eagerly utilised in the promotion of a vast commerce. Simi- 
larly, there is but one source of water power like that supplied 
at Niagara Falls by the Niagara River and there are no other 
fresh water courses comparable with the Great Lakes and the 
Mississippi and its tributaries. Though less unique other geo- 
graphical features are important and influence in large meas- 
ure the forms of industrial activity that flourish in the regions 
in which they are found. Differences in mineral resources 
are quite as marked. Geological changes, most of which 
antedated the appearance of man upon the earth, deposited 
beds of iron ore in one locality, strata of coal in another, veins 
of gold and silver, copper and lead in still others, and in others 
layers of barren rock. The influence which these mineral de- 
posits exert on the kinds of industry that are to be carried on 
in different sections and on their prosperity is too familiar to 
be dwelt upon. Differences in soils, climate, rainfall, and the 
other conditions affecting agriculture are equally in evidence 
and, as was indicated in the chapter on the Industrial Expan- 
sion of the United States, play their part in shaping a 
nation's industries. 

Although most of the characteristics of different pieces of 
land are, economically speaking, unalterable, others admit of 
considerable modification. However admirable a harbour may 
be as fashioned by nature it can nearly always be improved by 
man. Important as were the Great Lakes as a natural water 
course their usefulness has been much increased by the con- 



Old and New Countries 1 1 1 

struction of the Erie, Welland, and Sault Ste. Marie canals. 
Even more marked are tlie changes which man may make in 
preparing soils for agricultural use. Besides clearing land 
from forests and from stones and draining off surplus water, 
he can often change comparatively poor to very good soil by 
means of fertilisers. As the English economist, Professor 
Marshall, has suggested, the various qualities that fit a piece of 
land for the cultivation of a particular crop or series of crops 
may be compared to the links of a chain, and as the strength of 
a chain depends upon that of its weakest link, so the fertility 
of a piece of land depends upon the quality in respect to which 
it is most deficient. In the same way that the strength of a 
chain may sometimes be increased many fold by repairing an 
imperfect link, so land may often be raised to a much higher 
plane in the scale of fertility, if its one serious defect is 
remedied. 

In new countries where land is abundant and labour and Old 
capital are scarce and dear, the tendency is to rely mainly on countries 
the natural qualities of different soils and to make little use of Contrasted 
fertilisers. As a country becomes more populous and land is 
in greater demand, fertilisers are more freely used and the tend- 
ency is for each piece of land to be supplied artificially with the 
qualities in which nature has left it deficient. In this way 
continuous cultivation tends to obliterate the differences which 
originally distinguished different soils in the same general 
region and raise them towards one uniform standard of excel- 
lence. This makes it difficult if not impossible in an old coun- 
try to determine to what extent the fertile properties of a given 
piece of land are due to nature and to what extent to man. In 
the United States it is probably still true of agricultural land 
that it owes the principal characteristics that fit it for produc- 
tion to nature. This is even more the case, of course, with its 
mineral and forest lands. 

§ 63. If attention be confined to some particular product, Differences 
such as iron, coal, wheat, corn, or wool, and a study be made ^"^ Produc^^ 
of the conditions under which it is produced in a country like tion Due to 
the United States, it will be found that some of the supply in Lan^*^^^ 
comes from areas where the natural conditions are very favour- 
able to such production, that other portions come from areas 



112 Production: Land and Natural Forces 

where the natural conditions are less favourable, and still others 
from areas so situated that the production is barely profitable. 
To illustrate by reference to iron: some of the ore is of such 
richness and is so easily mined that each year's output affords 
a profit to mine owners and operators so large that in a short 
time it amounts to a princely fortune. Other ore is less rich 
and mined under greater difficulties, but still pays a hand- 
some profit over all the expenses of its production. Still other 
ore barely repays the expense entailed in putting it on the 
market. It may be, and often is, the case in mining that still 
other ore is taken out of the ground and sold at an actual loss 
to those engaged in the business, the loss being made good for 
a time out of the capital of such business men in the hope that 
the ore will improve with depth, or that it will command a 
higher price, or that something will occur to make the enter- 
prise a success. In addition to this poorest ore mined there 
are known to be vast bodies of ore of even inferior grades 
which might be mined and would be mined if market condi- 
tions were to change so as to make it profitable. In iron min- 
ing and other branches of mining there are thus different pro- 
ducers incurring quite different expenses of production, rang- 
ing from those whose expenses are low to those whose ex- 
penses are barely covered or even not quite covered by the 
price. The more fortunate receive in the current price a con- 
siderable margin over their expenses of production, which is to 
be explained, economically, as due to the superior natural re- 
sources which they exploit. 

A similar situation is found in farming and may be illus- 
trated by reference to the cultivation of wheat. The expense 
entailed in producing wheat on the bonanza wheat farms of the 
Dakotas, even including the transportation charge to the dis- 
tant market, is very considerably less than the expense of pro- 
ducing wheat for the same market in Michigan, owing to dif- 
ferences in the favourableness of soil and climate in the two 
sections. Some wheat farmers realise regularly year after year 
a considerable margin above the expenses of production in the 
current price, others realise a smaller margin, others barely pay 
expenses, while, in some years, still others incur a loss and 
have cause to regret tliat they did not allow their land to lie 



Law of Diminishing Returns 1 13 

idle. In addition to the land used for wheat there is still other 
land that is even poorer for this purpose, but that could and 
would be used to swell the country's wheat crop in case market 
conditions changed so as to make this profitable. In wheat 
farming and other branches of farming there are thus con- 
siderable differences in the expenses of production incurred by- 
different farmers, and since all obtain approximately the same 
prices for the same products in the central market, allowing of 
course for variations in quality, these differences cause some 
to reap large profits, some to reap smaller profits, some to just 
meet their expenses, and some, perhaps, actually to lose on the 
year's industry. Here again superior natural advantages are 
the source of the higher profits which some realise. 

An exactly similar situation is encountered in branches of Mapufac- 
manufacturing which utilise water power, the supply of which ^^^^^ 
is limited. Those who control superior sources of water 
power obtain their power more cheaply than their competitors 
tising inferior power. So long as all manufacturers sell their 
products for the same market prices those controlling the 
superior powers must reap an extra profit traceable to this 
natural superiority. 

From these typical illustrations it appears that land and ' ConclusioB 
natural forces assist different producers for the same market 
tanequally. Since they all receive the same prices and since 
these must be high enough t-o cover the expenses of produc- 
tion of the men who produce at the greatest disadvantage but 
whose supplies are necessary to satisfy the demand of the 
market, those producing under more favourable conditions must 
reap a profit due to these conditions. This special form of 
profit, which in the aggregate represents an important share of 
the wealth annually produced, is known in economics as rent 
and will receive further consideration in the chapter on that 
topic. 

§ 64.' But, it may be asked, i£ nature assists production so The Law of 
unequally in different localities, why is not the v^rhole supply of jnl^JJiirns 
each particular commodity produced in that one spot vi^hich is 
best adapted for the purpose? The mere statement of this 
question suggests the answer. All of the iron ore needed in 
the United States is not produced from the richest iron mine, 



114 Production: Land and Natural Forces 

because that mine does not contain enough ore to satisfy a hun- 
dredth part of the demand. All of the wheat required is not 
produced from that one acre best suited to wheat culture, be- 
cause it could not produce a millionth part of the wheat needed. 
Equally inadequate is the water power even of Niagara to 
generate the force needed to keep all the manufacturing 
machinery in the country in motion. Thus if all the ore in the 
best mine, if all the wheat the best acre could be made to pro- 
duce, and if all the power of Niagara were made available in a 
single year, it would still be necessary to have recourse to 
many other mines, acres, and sources of water power to satisfy 
the demand for these things. 
Statement In practice, as is well known, it does not pay to extract all 
the ore from even the richest mine at too rapid a rate, nor 
to cultivate too carefully even the best acre of land, nor to 
utilise too fully even the finest water power. In each of these 
cases the producers encounter what is known in economics as 
> the law of diminishing returns. Briefly stated this law is that 
\ after a certain point has been passed in the cultivation of an 
1 acre of land or the exploitation of a mine, increased applica- 
[ tions of labour and capital yield less than proportionate returns 
I in product, it being understood, of course, that no important 
i change is made in the method of cultivation or exploitation. 
' To illustrate by reference to wheat fanriing: A given acre of 
land may be cultivated in numberless different ways, each more 
elaborate than the preceding and each giving rise in a normal 
year to a somewhat larger crop. It may be ploughed once, 
twice, three, or even four times, and each ploughing will add 
somewhat to its preparedness to receive the seed. It may be 
harrowed correspondingly. The use of fertilisers familiar in the 
region offers a wide range of possible variation, each having 
some perceptible effect on the year's crop. While the crop is 
maturing a great number of different precautions may be taken 
■ to protect it from the ravages of birds, insects, storms, etc. It 
may be irrigated, or great pains may be taken to drain off 
" quickly an excess of rainfall. It may even, as is said to have 

been tried on the Island of Guernsey, be covered with glass at 
the period when it is most liable to injury. In these and hun- 
dreds of otlier ways labour and capital may be applied without 



The Margin of Cultivation 1 15 

"Exhausting the productive capabilities of the land. Some of 
these possible improvements in the method of cultivation be- 
yond the roughest scratching over of the soil may and prob- 
ably will yield more than proportionate returns in the wheat 
crop, but after a certain point has been passed all experience 
confirms the law that further improvements afford less than 
proportionate returns. Unless this were true, indeed, there 
would be little occasion for dividing up rural families and 
sending some of the sons to take up new land. Every addi- 
tional hand on the old farm would add his proportion to the 
joint produce and a farm of a hundred acres would support a 
score of families as well as one. 

To give precision to the statement of the law of diminishing The Exten- 
returns it is customary to distinguish between the " extensive " j^Y® ^^ 
and the " intensive " margins of cultivation. If, for example. Margins cf 
the demand for wheat increases so as to induce the production ^ tivation 
of a larger crop, the additional supply may come from either or 
both of two sources. Wheat farmers in the settled portions of 
the country may make their farming more intensive, that is, 
apply more labour and capital to the cultivation of each acre 
and in this way add to their crops. Others may be induced 
to take up new land and prepare it hastily for " extensive farm- 
ing." If both results follow the prospect of a somewhat higher 
price for wheat, as they would if farmers were always alert to 
their own interests and ready to adapt their methods to chang- 
ing market conditions, there will be two situations in which 
the expenses of producing wheat are just covered by the price. 
The wheat grovv^n on the poorest land hastily ploughed and 
planted, or on " the extensive margin of cultivation " will 
barely repay the expenses of production. So also will the ad- 
ditional wheat raised by the application of additional labour 
and capital on the " intensive margin of cultivation." The pro- 
ducer at either margin may in such a case be properly described 
as the marginal producer whose expenses of production are 
just covered by the price of the product. The fact that his 
additional wheat just about pays for itself will not, of course, 
prevent the farmer at the intensive margin from realising a 
rent on that wheat which he continues to produce at smaller 
proportionate expense. 



ii6 Production: Land and Natural Forces 

In the mining industry there will not be the same tendency 
to hasten the exploitation of each mine up to the point at which 
the price just covers the expense of getting out the most ex- 
pensive ore, because the bed of ore is, even while still under 
ground, a store of wealth to the mine owner. Uusally, after he 
has demonstrated the value of the deposit he will prefer to mine 
it in the most economical way without much attention to price 
fluctuations. In mining, therefore, it is at the extensive 
margin of exploitation, that is, in connection with the poorest 
mines, rather than at the intensive margin, that the expenses 
of production that influence price are to be found. 
Other Dif- § 65. In the preceding sections the natural differences be- 
Lands^^ ^° tween different pieces of land have been discussed as though 
they alone determined the importance of land to man. That this 
is far from being the case is illustrated on every hand. Each 
year sees large tracts of land in the United States enhanced in 
value simply because of changes in market conditions or im- 
provements in the means of transporting products to the market. 
To some extent the growth of markets is itself determined by 
natural conditions, but it will be simpler to regard it as the 
result of social changes. A few illustrations will indicate how 
important such social changes are in determining the value of 
land and the amount of the extra profit or rent which fa- 
vourably situated land affords. 
^^ Contrast, for example, the iron and coal deposits of Qiina 

Illustration with those of the United States. Well-informed geologists 
assert that, from the point of view of natural richness, those of 
China are scarcely if at all inferior to those of America. From 
every other point of view the latter have been and will be for 
many years the superior. This is because the tool and machine 
using habits of Americans, their steel railroads, steel cars, steel 
steamships, etc., represent an enormous demand for these com- 
modities and make the exploitation of such deposits exceed- 
ingly profitable. There are indications that China is about 
to enter upon an industrial revolution similar to that through 
which Japan has passed in the last generation and that as time 
goes on changed social conditions will cause coal and iron to 
be appreciated there somewhat as they have been for a cen- 
tury in the Western World. Such a revolution will, of course. 



Suburban vs. Country Plots 117 

cause an immense increase in the value of the now practically 
worthless iron and coal deposits of the country and enable the 
fortunate owners of the richer of those deposits to reap large 
profits or " rents " from their exploitation. 

Next, contrast an acre of agricultural land on the outskirts Suburban 
of a large city with an equally fertile acre many miles from country 
any centre of population. The first point to be observed is the Plots of 
different uses to which the two pieces of land will be put. The contrasted 
back-country acre will be sown with some staple crop, such as 
wheat, corn, or cotton, since it alone will repay the expenses of 
transportation to the distant market. To it labour and capital 
v/ill be applied probably only up to the point where the tendency 
to diminishing returns shows itself, because, in the given situa- 
tion it will pay better to apply additional labour and capital to 
new land than to press cultivation beyond this point. The 
suburban acre, on the other hand, will be sown with the most 
delicate and perishable vegetables in demand in a city market. 
Labour and capital in the forni of fertilisers, etc., will be ap- 
plied far beyond the point of diminishing returns because the 
quantity of land near the city which can be utilised for truck 
farming is exceedingly limited and city prices for green vege- 
tables are so high that very intensive cultivation is profitable^ 
From the point of view of profit the back-country farmer may 
be on the very margin of extensive cultivation, that is, his ex- 
penses, increased largely by the freight he must pay to get his 
crop to market, may just about equal the price he receives for 
his crop. The suburban farmer, the native fertility of whose 
land was assumed to be the same, is sure to reap a high rent 
from his business. The final " doses " of labour and capital he 
applies to his land may be just paid for in the price he gets for 
the additional produce that results from them. It is to his 
interest to continue his cultivation so long as it is remunerative. 
But all earlier applications of labour and capital will be more 
than covered by the price received for what they added to the 
product. As a whole his acre v/ill show at the end of the 
year a high rent over expenses, ascribable to its nearness to 
the market or to social rather than to natural conditions. 

A still more striking contrast is presented by a comparison of 
city real estate, priced by the front foot, with agricultural land. 



ii8 Production: Land and Natural Forces 



City and 
Country 
Plots of 
Land 
Contrasted 



Conclusion 



priced by the acre. Next to man's need for food and clothing 
comes his need for a shelter or for a home. The former may 
be produced at great distances and brought to him from day 
to day in the small quantities that he requires. The latter 
must be available in its entirety all the time, and it must not 
be so far away from his place of business as to make his daily 
trips back and forth unduly irksome. This accounts for the 
fact that when land begins to be thought of for building pur- 
poses its importance is at once greatly enhanced in human esti- 
mation. The more concentrated the activities of a city and 
the larger its population, the greater will be the demand for 
each piece of land favourably situated for building. Thus as 
a place changes from a country four-corners to a village, then 
to a town, and then to a city, the values of building sites within 
its limits tend to rise, although with many fluctuations as re- 
gards partictilar quarters, and the rents which their utilisation 
affords to increase correspondingly. The invention of the 
bicycle, the trolley-car, and other conveniences for passing 
quickly and easily from one's place of business to one's home 
may check this tendency somewhat, and if these improve- 
ments follow each other rapidly may check it entirely or set 
up a counter tendency, but during the last quarter of a cen- 
tury the increase in the value of city real estate and of the 
rents that such property affords has been a phenomenon com- 
mon to all civilised countries. How far this may go in par- 
ticular instances is illustrated by the fact that a lot sold in the 
heart of London recently for a price v/hich would make an 
acre of unimproved land in that locality worth $2,300,000. In 
some sections of New York City land is equally valuable. In 
these cases also the increased value and correspondingly en- 
larged annual return are ascribable to social rather than 
natural conditions. 

Generalising on these illustrations, we may conclude that di£- 
l ferences in situation in respect to markets and other social con- 
: ditions are quite as influential as natural differences in deter- 
mining the importance of different pieces of land and the rents 
I they afford. When these social conditions are created by the 
■ forethought, enterprise, and labour of some particular indi- 
vidual or group of individuals, as when, for example, a suburb 



The Rent of Land 1 19 

is deliberately planned and brought into being by a syndicate 
of real-estate operators, we have a case similar to that presented 
by the modification of the character of the land by drainage or 
fertilisation, in which it is very hard to distinguish man's pur- 
posive share in the result from the share of an unconsciously 
evolving community. These difnculties receive fuller con- 
sideration in the chapters on Distribution. 

§ 66. In this chapter attention has been called to the natural Summas-y 
differences between different pieces of land, to the law of 
diminishing returns which restrains men from trying to derive 
more than a certain product from each piece of land, and to the 
special profit or rent which arises in consequence of the fact 
that lands of different qualities are employed to supply the 
same commodities in the same markets. It has just been shown 
that differences in situation in relation to markets are equally 
potent in determining rents. 

In discussing rents it has been assumed that the man who The Rent 
uses the land is also the land owner. In European coun- *^^ ^^nd 
tries and to an increasing extent in the United States this 
is not the case. Land ownership is coming to be more and 
more divorced from land utilisation and as a result the 
extra profit ascribable to the superiority of particular pieces 
of land is clearly distinguishable from other forms of profit 
going to the cultivator or occupier. It must be paid as " rent " 
to the land owner, or the latter will prefer to cultivate or occup}'- 
the land capable of affording such profit himself. In future 
this share of wealth will always be referred to as " rent " to 
distinguish it from other shares to which the designation 
" profits " more properly belongs. 

REFERENCES FOR COLLATERAL READING 

* Marshall, Principles of Economics, Book IV., Chaps. I., II., and 
lll.;lValker, Political Economy, Part II., Chap. I., and* Land and 
Its Rent; A'/<r//£>/.?<7«, Principles of Political Economy, Vol. I., Book 
I.. Chaps. II. and IV, 



CHAPTER VII 

PRODUCTION ; LABOUR AND CAPITAL 

Labour as § 67. Of co-equal importance with nature as a factor in pro- 

Production Auction is man. His contribution to the productive result de- 
> pends partly upon his capacity as an individual and partly upon 
■ the way in which his efforts are applied, that is, whether to 
direct or to capitalistic processes of production, or whether 
independently or in co-operation with the organised efforts of 
others. Each one of these circumstances merits separate con- 
sideration. 
Qualities The principal qualities which determine an individual's 

Productiv^ capacity as a producer are the following: (i) health, (2) 
nessof physical strength and endurance, (3) intelligence, (4) judg- 

ment, (5) ambition, (6) energy, (7) perseverance, (8) imagi- 
nation, (9) mechanical ingenuity, and (10) technical knowl- 
edge. The importance of health and physical strength, espe- 
cially to those doing manual work, is obvious. Intelligence 
and judgment are important adjuncts to the man with piclc 
and shovel ; they are indispensable to men in the higher grades 
of industry. Ambition, energy, and perseverance are quali- 
ties that characterise all the world's greatest men, and without 
which other qualities are of little value. Imagination is im- 
portant because to it are traceable all great industrial inven- 
tions and discoveries. Mechanical ingenuity, though less 
important to the mass of men than formerly, when fewer tasks 
were performed by automatic machinery, is still a valuable 
quality. Technical knowledge, on the other hand, gains each 
year in importance as the ways of doing things that are found 
to be most efficient increase in complexity. It is evident that 
the importance of these different qualities depends upon the 
kind of work to be done and that industrial progress tends to 
lessen the importance of some while it increases that of others. 
§ 68. The above qualities, like other human characteristics. 



Health and Strength 12 1 

are either inherited or acquired. Whatever their origin in Qualities 
special cases the same general conditions, acting either on sue- il^^^l^^I 
cessive generations or on living men, account for their presence, or Acquired 
Having in mind especially the influences affecting the Ger- 
manic race, to which a large proportion of the most advanced 
peoples of the present day belong (Americans, English, Ger- 
mans, etc. ) , we may say a few words in regard to each quality. 

The conditions influencing health and strength are well Health and 

p , , Strength 

understood. Fresh air and exercise, good food, adequate pro- 
tection from dampness and sudden changes in temperature, and 
the avoidance of all kinds of excesses, are the principal requi- 
sites. Of these good food is perhaps the most important. 
The human body resembles a machine, and the amount of work 
it can do depends very largely on the quality and quantity of 
the fuel, that is, the food, with which it is supplied. Up to the 
time of the industrial revolution Germanic peoples enjoyed 
many of the above conditions and the physique of the race 
was consequently well developed. The introduction of 
machinery has served to concentrate the populations of ad- 
vanced countries to an ever-increasing extent in cities and to 
substitute for open-air work, work indoors in shops and fac- 
tories. There has been reason to fear that this might perma- 
nently impair the health and vigour of those very peoples which 
have led in the race for industrial ascendency, not only 
because of its direct effect, but also because the monotony of 
such labour fosters dissipation. To counteract these evil tend- 
encies vigorous measures have been resorted to, notably in 
England and Germany, where sanitation and factory acts have 
been passed by the government and wTiere coffee-houses, work- 
ingmen's clubs, etc., as substitutes for the saloon, have been 
created through the efforts of private individuals. A great 
deal of attention is being given, especially in those countries 
which maintain large standing armJes, to the question of de- 
termining what diets are best for people doing different kinds 
of work, and model kitchens are being organised in the poorer 
quarters of cities to teach people to appreciate nutritious and 
properly prepared foods. Efforts to improve the tenement 
houses in which the populations of the larger cities live are 
also being put forth and with some success. Finally mention 



122 Production : Labour and Capital 

should be made of the pubhc baths, the playgrounds for chil- 
dren, and the open-air gymnasiums which are being erected in 
those cities in Europe and America which are most progressive 
in caring for their inhabitants. As is shown by mortality 
statistics, these efforts are beginning to bear fruit in the im- 
proved health of present-day city populations, but much yet 
remains to be done for both city and country people. There is 
no form of philanthropic activity which is more certain to benefit 
mankind than that designed to improve the conditions under 
which the mass of men live and work. Restored health and 
vigour are blessings in themselves, but equally important is the 
fact that they make for more efficient production and enable 
their possessors not only to hold what they have gained, but to 
steadily add to their advantages through their increased earn- 
ing povv'er. Every improvement that can be made in home and 
factory surroundings without undermining the independence 
and self-respect of the population is thus a certain means of 
" helping people to help themselves." 
Intelligence The development of intelligence and judgment depends 
Jud'^ment largely upon education, and here too undoubted progress has 
been made. In place of the formal and traditional methods 
that have prevailed in the schools, methods having direct 
reference to the organic development of children are begin- 
ning to be introduced. Moreover, the proportion of children 
who go to school is on the increase, and the expenditures that 
modern states make for public education are growing. Never- 
theless there is still much to criticise in current educational 
practices and in the short-sightedness of democratic states in 
not contributing even more liberally to the support of educa- 
tion. In it lies the hope of the future, since through its agency 
the standards of each generation of children are elevated. 
These higher standards may be passed on to the next genera- 
tion of children to be raised still further in the schools, and so 
the process may be repeated with steady progress as its neces- 
sary consequence. If improving educational advantages are 
added to steadily improving home suroundings, the advance 
of the race cannot fail to be rapid. 

Ambition, energy, and perseverance depend partly upon a 
people's range of wants in comparison with the means to their 



Ambition and Knowledge 123 

satisfaction, and partly on the probability which the situation Ambition, 
presents that effort and enterprise will be crowned with sue- ^^^^Sy, 
cess. These qualities are conspicuously lacking among a severance 
people which has developed few , wants and whose means of 
livelihood are so limited by natural conditions that even the 
greatest efforts cannot result in a large command over economic 
goods. They are as conspicuously present among a people 
with numerous and varied wants to which are open a great 
variety of promising ways of acquiring wealth. This contrast 
is well illustrated by the difference between the peasantry of 
Eiirope and the plain people of America. Poverty of resources 
and the restrictions of a class organisation of society tend to 
stifle the ambitions of the former as markedly as wealth of re- 
sources and absence of rigid class barriers tend to stimulate 
those of the latter. The most desirable situation for the fos- 
tering of these qualities is evidently one in which different 
scales of living prevail side by side and in which at the same 
time a fair degree of equality of opportunity is preserved. The 
danger in a country like the United States is that an aris- 
tocracy of wealth may grow up to monopolise the easiest means 
for acquiring further wealth and to hold the mass of the people 
down to working for mere wages. Under such circumstances 
different scales of living would foster not ambition but merely 
envy and bitterness in the minds of those who have little pros- 
pect of improving their condition. This danger must be kept 
in view in connection with the question of the limitations that it 
may be desirable to impose upon monopolies and the rights 
of property. 

The conditions favourable to the growth of imagination, imagina- 

mechanical ingenuity, and technical knowledge call for no ex- ^^^F' iQg©- 
111- • X • • <■ -11 1- 1 , , T nmty, and 

tended discussion. Imagination is still little understood. It Knowledge 

seems to be fostered by variety of surroundings and experi- 
ences, and by attention to unsolved problems which contain an 
element of mystery. Perhaps the most that is to be hoped for 
from present educational methods is that they will permit some 
part of the imagination which seems to be natural to childhood 
and youth to be carried on into manhood. Manual training, to 
which more and more attention is being given in the United 
States and abroad, is, of course, directly productive of 



Evolution 

and 

Production 



124 Production: Labour and Capital 

mechanical ingenuity. Perhaps the greatest progress made in 
connection with any of the enximerated quahties is to be found 
in the field of technical knowledge. Technical schools, courses 
in colleges and universities, correspondence and evening 
classes, and journals unite to bring the knowledge necessarjr 
to efficient production within the reach of all, aspiring enough 
to desire it. This progress has gone so far already that there 
seems to be more danger that technical education will be begun 
too early than that too little attention will be given to it. In 
addition to these admirable facilities for disseminating knowl- 
edge already acquired, more and more attention is being de- 
voted to the acquisition of new knowledge. Every State in 
the United States has at least one privately or publicly en- 
dowed university intended to encourage scientific research. 
To supplement these are the national institutions dedicated ex- 
clusively to research work, the Smithsonian, and the recently 
founded Carnegie Institute. Moreover, many individuals are 
devoting their lives and their fortunes to experiments directed 
towards discovering improved methods of satisfying human 
wants. Taking all of these things into account we may pre- 
dict with confidence continued progress in the technique o£ 
production. 

Co-operating with the conditions favourable to the develop- 
ment of individual capacity that have been enumerated are the 
silent forces of evolution. Although interfered with by the 
growth of benevolent instincts and agencies which intervene 
to preserve many of the unfit from destruction, these forces aid 
powerfully in the process by which each people surrounded by 
a favourable environment becomes fitted to make fullest use of 
that environment. Weak and incapable lines of heredity are 
cut off in each generation and the field is left to the stronger 
and more capable. In prosperous communities the weeding- 
out process affects not merely the underdeveloped and underfed^ 
but the overdeveloped and overfed. Dissipation is as common 
a cause of premature death and failure to continue the line of 
heredity as starvation. Evolution thus operates not only to 
enable each succeeding generation to get a larger return for its 
efforts, but to educate it to a wiser use of its material advan- 
tages. The surviving type of successful man is less and less 



Capitalistic Production 125 

self-indulgent and more and more philanthropic in his instincts 
and habits as generation follows generation. From this it re- 
sults that progress itself causes more and more attention to be 
devoted to the conditions leading to progress and hence tends 

to be a cumulative process. 

§ 69. Given a certain standard of individual capacity on the Capitalistic 
part of a labouring population, its productiveness depends next ^° "^ ^^" 
upon the extent to which its methods are capitalistic. By 
capitalistic production is meant production which attains its 
ends, not by the direct and immediate creation of consumable 
goods, but indirectly through the creation first of tools, 
machines, and other material aids to production and the crea- 
tion subsequently with the help of these capital goods, of the 
consumable goods desired. CapitaHstic production is thus 
roundabout instead of direct, and involves a longer interval of 
time betAveen its inception and its completion. It can be 
adopted only by men who are willing to forego immediate 
gratifications and permit their incomes to assume the interme- 
diate form of capital goods so that in the end a larger output i 
of consumable goods may result. Such conduct involves 
abstinence from present consumption, saving income or pro- 
ductive powers instead of using them to minister to immediate 
consumption, and waiting until the longer productive process 
shall be completed. " Abstinence," as the term is here em- 
ployed, denotes simply not doing something that ordinarily it 
would be pleasant to do. It need not necessarily involve any 
element of pain or sacrifice, because the purpose accomplished 
through it may be even pleasanter than the things abstained 
from. Usually, however, abstaining from present consump- 
tion does involve some sacrifice for the psychological reason 
already explained.* 

The superiority of capitalistic over direct production and the Ad van- 
reasons for it will appear clearly from a few illustrations. One 1^-®.^ '^y . • 
of the most urgent needs of Crusoe on his sea-girt island was Production 
fresh water. Having found a spring he might satisfy this 
need by scooping up the water with his hands. This would be 
direct production. Or he might make a cup of bark in which 
he could dip out, by stooping once, all of the water he could 
* Chapter IV., Section 36. 



Capital 
Goods and 
Capital 



126 Production: Labour and Capital 

drink. Such a eup would be a capital good and the process 
would be capitalistic production. It would multiply largely 
the return resulting from the effort of stooping. Or he might 
fashion a larger vessel in addition to his cup with which he 
could dip out at one time all of the water he required for a 
whole day. Tliis would be more highly capitalistic produc- 
tion. Its advantage would be that it would enable him to 
stock his hut with all the water he required by making but one 
trip a day to the spring. Or, finally, if the spring happened to 
be at a higher level than his hut, he might construct a trough 
of hollowed logs capable of conducting the water from its 
source to his very door. This would be miuch more highly 
capitalistic production than any of the other processes, but its 
return would be correspondingly larger. The force of gravity 
would now relieve Crusoe entirely from the task of carrying the 
water, and all that he would need to do to secure an abundant 
supply would be to keep his trough in repair. 

These illustrations are typical of the advantages of capital- 
istic production. It enables man to apply his own efforts more 
effectively, as when he uses tools or implements, or to command 
the assistance of natural forces which without the aid of capital 
goods would be beyond his control. The forces of gravity, 
steam, and electricity can be utilised effectively only in connec- 
tion with the forms of capital appropriate to them. For these 
reasons a given expenditure of effort in capitalistic production 
is usually more fruitful of results than the same expenditure in 
direct production, and the more highly capitalistic or prolonged 
the process the larger, generally, the return in consumable 
goods for each unit of effort expended. 

§ 70. Business mien are in the habit of speaking not of 
" capital goods," but of " capital." By this they mean some- 
times capital goods themselves, but more often these goods 
measured in terms of money. Capital goods wear out and need 
to be replaced. Individually they come into being, are used, 
and are then discarded. But capital, as the business man 
understands it, is more permanent. It is the complex of capi- 
tal goods used in connection with each branch of production 
measured in terms of money. To the extent that prices are 
stable and that the efficiency of production is maintained the 



Varieties of Capital Goods 127 

money equivalent of this complex of capital goods changes 
little if at ail. Each year's inventory shows about the same 
aggregate, although each year the particular capital goods em- 
braced in the inventory are different from those of the year 
before. 

§ 71. In comparing different methods of capitalistic produc- Fixed and 
tion two factors must be considered: the average amount of Capita?^^^ 
capital required for each process and the average time that Goods 
elapses in each case before this capital is completely used up or 
converted into consumable goods. For example, compare two 
branches of manufacturing in one of which the entire equip- 
ment of capital goods has to be renewed on an average once a 
year, while in the other the equipment requires renewal only 
once every two years. If each factory requires exactly the 
same amount of capital from day to day the first will require 
for continuous production twice as large a replacement fund 
as the second because its capital goods wear out twice as fast. 
Economists give precision to the contrast indicated in the illus- 
tration by distinguishing between ilxed and circulating capital 
goods. Fixed goods are those which endure for some little 
time without replacement. Circulating goods are those, like 
coal, which are destroyed in a single use. It is obvious that 
these are relative terms and that capital goods present all pos- 
sible gradations of fixity. 

Capital goods differ also in the extent to which they are SpeciaHsed 
specialised or free, or in their mobility. Raw materials such as Capital 
coal, iron, etc., are as a rule very mobile. They may be de- Goods 
voted at will to any one of a dozen different productive uses. 
On the other hand, machines, buildings, etc., are highly special- 
ised and either cannot be diverted to any other use than that 
for which they were originally designed or not without a great 
loss in value. Pennanent improvements in land are of course 
quite immobile and an unwise creation of this type of capital 
goods may result in complete loss without possibility of 
recovery. 

Some writers assert that of all forms of capital, money is ^'^^^^^7 
the most mobile, having in mind the ease with which it may be 
exchanged for other goods. This important quality is not 
mobility, but exchangeability. From the point of view of 



Fixed 

Capital 

Increasing 



Labour 
Subject to 
Law of Di- 
minishing 
Returns 



1 28 Production : Labour and Capital 

mobility, money is a highly specialised capital good. This is 
particularly true of paper money, which becomes practically 
valueless when deprived of its monetary quality. 

With the industrial progress of the world the proportion of 
fixed and specialised capital goods shows a tendency to in- 
crease. This results in lessened mobility for capital goods as 
a whole and is one of the causes of the prolonged periods of 
depression which invariably follow business crises under present 
conditions. 

§ 72. In discussing the part which land and natural forces 
play in production, it was pointed out that they yield dimin- 
ished returns to human industry after a certain point has been 
passed in their utilisation. A similar law of diminishing re- 
turns applies to labour and capital. This may be shown by 
assuming one factor fixed while the other increases. Con- 
sider for example the case of a Crusoe so abundantly supplied 
with land of the best quality that he has no experience of les- 
sened returns from that quarter. Assume him to be cast upon 
his island with a very limited stock of capital goods, but with 
full knowledge of the superiority of capitalistic production and 
with sufficient resolution to provide himself with other capital 
goods as rapidly as his situation permits. He will have in 
mind a list of the capital goods which he requires, arranged 
probably in the order of their importance. A cup, a pail, a 
bow and some arrows, a boat, etc., will be some of the things 
he will plan to make. For a time the capital goods he fashions 
will be of so nearly equal importance in aiding him to produce 
consumable goods that he will be conscious of no tendency to 
diminishing returns. After a while, however, when his rough 
equipment of capital goods is fairly complete, he will have to 
weigh in his mind the advantages of adding duplicate goods of 
some kinds or of substituting better-made goods for others 
already in his possession. At this point his expenditure of 
effort in making capital goods and his patience in waiting until 
these efforts bear fruit in consumable products will be less 
richly rewarded than before. One bow added enormously to 
his ability to provide himself with food, a second of a little dif- 
ferent kind will add also to the ease and certainty vv^ith which 
lie can secure game, but in a lessened degree. A third bow 



The Law of Diminishing Returns 129 

could perhaps be used advantageously, but the added game 
ascribable to it would probably barely reward the effort 
involved in its production. In this case the productiveness of 
Crusoe's labour is increased by each successive addition to his 
capital, but, after a certain point has been passed, this increase 
is at a diminishing rate. 

The position of an industrial society as regards the use of 
capital goods is not materially different from that of an 
isolated producer. If the number of its workmen is stationary, 
while their equipment of capital is being constantly added to, 
the productiveness of its industry may increase for an indefi- 
nite period with every addition to its capital, but this increase 
v*/ill be at a diminishing rate. The fixed labour force may 
be thought of as analogous to a limited supply of land. In 
each case the addition of successive increments of capital adds 
to the size of the product, but, after a certain point has been 
passed, the addition is only at a diminishing rate. The inven- 
tion of new and more efficient forms of capital goods may post- 
pone the period when the law of diminishing returns will begin 
to operate as regards either land or labour, but this in no wise 
lessens its importance as one of the far-reaching tendencies of 
which economics must take account. 

That the same law applies to capital becomes evident when Also Capital 
it is considered what would result if its supply were fixed 
while successive additions were being made to the working 
population. With every increase in the number of workmen, 
it would be necessary to utilise the available tools, machines, 
etc., more intensively. For a time this might be done without 
any tendency towards diminishing returns, but this could not 
be the case indefinitely. Sooner or later, as bare-handed work- 
men continued to be added, the fixed fund of capital would 
show diminishing returns just as did the fixed labour force 
when the conditions were reversed. 

That diminishing returns must after a time result from either 
situation is really a corollary from the principle that the most 
effective co-operation between labour and capital is only 
realised when they stand in the right quantitative relation to 
one another. If after this relation has been established, capital 
goods increase while the number of workmen remains fixed, or 



Methods 
of Accumu- 
lating 
Capital 



Saving and 
Investing 



Borrowing 

and 

Investing 



130 Production: Labour and Capital 

workmen increase while capital goods remain unchanged, the 
co-operation between them must be rendered less effective, or, 
what is the same thing, diminishing returns must be accepted 
as the reward of such co-operation. If both factors increase 
together there will be no occasion for any reduction in the 
return so long as new land equal in quality to the old is avail- 
able. It is therefore not the increase in the factor whose sup- 
ply is being added to alone that causes the diminution, but that 
increase coupled with the lack of response on the part of the 
other factor. 

§ 'j^. The only method by which Crusoe could acquire new 
capital was by applying his own efforts to its creation. He 
must produce it as well as save it. In industrial society the 
production of capital goods is effected like the production of 
consumable goods usually through the agency of business 
managers who produce for the market. The " saving " which 
inspires this production is performed by a different set of people 
conveniently designated as capitalists. A few illustrations will 
serve to show how the savings of capitalists help to bring 
capital goods into existence : 

I. A farmer who wishes to enlarge his barn saves part of 
the money he receives for his crop and uses it to buy lumber 
and to hire masons and carpenters to make the desired im- 
provement. In this case by buying lumber he encourages the 
production of more lumber, or virtually hires lumbermen, saw- 
mill hands, etc., to produce this kind of capital good, just as he 
subsequently hires men to convert it into a new wing to his 
bam. He turns over to others his command over society's 
wealth, which they use to satisfy their wants. In return he re- 
ceives the addition to his barn, a new capital good added' to- 
society's productive equipment. 

II. Very often the farmer who wants a larger barn is un-^ 
willing or unable to save enough to pay for it himself. If he is 
a man of enterprise he is not likely to be deterred by this cir- 
cumstance from taking steps to obtain it. Having a valuable 
farm to pledge as security, he is in a favourable position to bor- 
row. He may apply to a well-to-do neighbour who has saved 
the money needed out of his income and is looking for a chance 
to invest it. In this case the neighbour does the saving and 



Borrowing and Investing 131 

thereby makes possible the building of the addition ; the farmer 
decides how the saved income shall be invested in a concrete 
form of capital, taking all the risk of the venture and insuring 
the lender against loss by pledging or mortgaging his farm. 
The actual creation of the addition results as before from the 
labour of woodchoppers, mill hands, and carpenters, who are 
paid for their services as they render them. 

III. Instead of applying to a neighbour the modern farmer Borrowing 
who wishes to borrow money is more likely to apply to a bank, ^^^'^ ^^ 
an institution which receives on deposit individual savings and 
lends them together with its own capital and its credit to cus- 
tomers. In this third and most typical case, the saving of in- 
come is performed by the depositors of the bank, who know 
nothing about the ultimate disposition of their savings. The 
lending is performed by trained men who give all their time 
and thought to this business, the bank officers, and the invest- 
ing or conversion of the purchasing power into capital goods 
is done as before by the farmer. 

In these ways and in others too similar to require separate Borrowing 

description the accumulation of capital goods results from sav- ^^^ 

>T 11 • 1 11- r ■ 1 Always for 

mg. Not all savmg, however, leads to an mcrease of capital, investment 

The deposits in a bank may be loaned to someone who wishes 
to spend them for consumable goods. In such a case, what 
depositors abstain from spending, borrowers spend, and the 
community's stock of capital remains as it was before. In 
order to cause an increase in capital, saving must be supple- 
mented by investing, unless, indeed, it takes the fonti of hoard- 
ing, which is unusual in modern communities. 

In the above illustrations " money " or " income " is spoken Q^^f i^* 
of as the thing " saved." Money is, of course, merely the Money 
medium by means of which control over one kind of wealth ^^® 
which the individual does not want is exchanged for control 
over another kind which he does want. What is really saved 
in every case is the capital goods themselves which are brought 
into existence directly or indirectly by the investment. Thus 
in the examples the addition to the barn is saved and added to 
society's capital equipment. 

Often investment is thought of, especially in cities, as buying 
real estate, or stocks or bonds. Such purchases are invest- 



Buying 
Stocks and 
BondsDoes 
not Add to 
Capital 



Kinds of 

Capital 

Goods 



Land and 
Capital 



132 Production: Labour and Capital 

nients from the point of view of the individual, but to the com- 
munity as a whole they represent simply transfers of owner- 
ship over capital goods already in existence. The investment 
proper appears when the purchasing povi^er exchanged for 
stocks or bonds is used for the development of some new or for 
the better equipment of some old enterprise. Just as money 
deposited in a bank may never lead to any real addition to 
capital, so money invested in stocks or bonds may finally be 
spent for consumable goods and leave no trace behind. 

§ 74. Capital goods may be defined as products of past in- 
dustry used as means not to the direct satisfaction of wants 
(consumption goods), but to further production. They include 
all the intermediate products which figure in roundabout or 
capitalistic production. The principal kinds of capital goods 
are: 

(i) Permanent improvements in the physical environment, 
in the form of drainage systems, canal excavations, tunnels, 
roadbeds, etc. 

(2) Buildings of all kinds except those serving no indus- 
trial purpose. 

(3) The rolling stock of railv/ays, vehicles, etc., not used 
merely for pleasure. 

(4) Tools and machinery. 

(5) Farm and draft animals. 

(6) Seed, raw materials, and partially finished goods in 
process of production. 

(7) Finished goods in the hands of dealers. 

(8) Money. 

In connection with " permanent improvements " a difficulty 
is encountered that has caused no little confusion. Land as a 
gift of nature is not regarded as a capital good. But perma- 
nent improvements in land become for practical purposes por- 
tions of the land itself. Thus in old countries most land is 
partly a gift of nature and partly a capital good and it is often 
impossible to distinguish between the two. A simple way out 
of this difficulty is to describe land also as a capital good, and 
this is done by the business community and by some econo- 
mists. To the writer simplicity so secured seems bought at too 
high a price, since it involves a disregard of the distinction, be- 



Dealers' Stocks are Capital 133 

lieved to be fundamental, between man's part in production and 
nature's part. A better plan seems to be to accept the difficulty 
as inevitable and to recognise that in distinguishing between 
what is and what is not capital, economists have the same sort 
of task as confronts biologists in distinguishing between what 
is animal and what is vegetable. As regards most things 
classification in both instances is easy. 

Along the same line is the temptation to include as capital Acquired 
goods, skill and training that have been acquired as the results capital 
of " investments in education." From one point of view such 
acquired aptitudes for production should be included. Their 
origin, so far as m.otives are concerned, is similar to that of 
other capital goods. Moreover, like other capital goods they 
are aids to further production. Yet economists generally de- 
cide against such inclusion because they deem it important to 
distinguish sharply between man and the material aids he uses 
in production. On the whole it seems best to adhere, in the 
present treatise, to this plan of classification. 

Obiection is sometimes made to the inclusion of '* finished Dealeis' 
goods in the hands of dealers " in the list of capital goods. Capital 
But this follows logically from the principle (which has already 
been defended) that trade is a branch of production. An im- 
portant requisite to the efficiency of production is a regular and 
continuous ministering to the wants of consumers. Most eco- 
nomic goods must be forthcoming regularly from day to day 
or at particular periods in order to possess high utility. To 
secure this result the business organisation of society must 
provide, first, for the carrying over of stocks of goods, such as 
agricultural products that mature only periodically but that are 
needed continuously, and, second, for the carrying of sufficient 
supplies of goods that mature continuously, to insure a con- 
tinuous stream of commodities from producers to consumers, 
no matter how far they may be removed from each other. 
Thus wheat production is efficient in proportion to the care 
with which the crop harvested during the summer months is 
handled so as to meet the community's need for bread during 
the entire year. All of the conveniences, such as elevators, 
warehouses, etc., which contribute to this end, as well as the 
stored wheat itself, are capital goods. In the same way if it 



Money 



Progress in 
Capitalistic 
Production : 
Tlie Middle 
Ages 



The 

Growth of 
Commerce 



Influence 
of the 
Industrial 
Revolution 



134 Production : Labour and Capital 

takes, on the average, thirty days to transport bananas from the 
growers in Central America to consumers in American cities it 
is indispensable to the efficient production of this fruit that a 
stock equal at least to thirty days' consumption be kept regu- 
larly in transit either in the warehouses of shippers, on the 
ocean, in the warehouses of wholesale dealers, or ripening in 
the shops of retail venders. Such a stock is a part of the com- 
munity's capital goods. 

The last kind of capital good enumerated, " money," is too 
important to be dismissed with a few words and is therefore 
treated in separate chapters. 

§ 75. The development of capitalistic production to anything 
like its present proportions is of comparatively recent date. 
During the Middle Ages the capital goods used were so few 
and crude that each producer supplied himself with his needed 
equipment without great difficulty. Instead of commanding 
interest the accumulated wealth of the rich had often to be 
stored and a fee paid for its safe-keeping. 

As commerce developed there was an increasing demand for 
capital in the form of vessels and goods with which to stock 
them, and merchants, like Antonio in The Merchant of Venice, 
were often able to turn other people's accumulations to very 
profitable account. The use of tools and machinery in agri- 
culture and manufacturing made little advance, however, be- 
fore the period of the industrial revolution. During all these 
centuries the chief service of saving with a view to the future 
was in connection with the preservation of flocks and herds and 
the husbanding of the food supply and seed from one harvest 
to the next and from years of abundance to the lean years that 
were sure sooner or later to follow. 

Since the beginning of the last century capitalistic produc- 
tion has advanced in the Western World by leaps and bounds. 
In place of simple hand tools and foot and horse-power 
machines, complex machines to be driven by water, steam, or 
electrical power have come into use. These have been multi- 
plied so rapidly that the average capital equipment of the 
modern producer is easily a hundredfold larger than that of the 
medis;val workman. Enormous investments have been made 
also in improved transportation facilities and in buildings for 



Conclusion 135 

the safe housing of machinery, operatives, and goods. As a 
result of this progress in capitalistic production and of the 
contemporaneous discovery and invention of new and more 
efficient kinds of capital goods, the productiveness of human 
industry has been immensely increased, A large part of this 
increased return goes as interest to those who allow their 
wealth to remain in the form of capital in preference to con- 
verting it into consumable goods for the gratification of their 
immediate wants. The part that remains as the wages of 
labour has also grown, however, so all classes have derived 
material benefit from the change. 

§ 76. In this chapter the circumstances determining indi- Summary 
vidual capacity and the nature and results of capitalistic 
production have been considered. It has been shown that the 
latter involves " abstinence," " saving," and " waiting," in 
addition to the mere mechanical production of capital goods, 
and it has been implied that these are the grounds for the pay- 
ment of interest to those who embark their wealth in indus- 
trial enterprises. The different kinds of capital goods have 
been distinguished, and finally the progress of capitalistic pro- 
duction has been traced and its advantages indicated. 

Since capitalistic processes add so largely to the productive- Conclusioa 
ness of industry, the development of thrift, or a willingness to 
forego present gratifications for the sake of the future, is an im- 
portant condition to further progress. What is most needed 
is not a general development of thrift, for many individuals 
are already inclined to carry saving to the point of parsimony, 
but a development of it, or of the prudence and forethought on 
which it depends, among the working classes. Accustomed 
for generations to live from hand to mouth, wage-earners are 
only just beginning to appreciate how much the accumulation 
of property may contribute to their well-being. Its principal 
advantage for them, individually, is that it will serve to carr}^ 
them over periods of unemploymient without that loss in effi- 
ciency that is the most pitiful result of enforced idleness for 
men who have nothing to fall back upon. For the whole com- 
munity the aggregate savings of a thrifty labouring popula- 
tion would cause a great increase in its equipment of capital 
goods, and a corresponding improvement in its industrial 



136 Production: Labour and Capital 

processes. On both accounts the development of providence 
and forethought among the masses is earnestly to be desired. 
Equally important are improvements in the conditions of wage- 
earners which will encourage them to save by rendering spend- 
ing up to the full limit of their incomes less imperatively 
necessary. 

REFERENCES FOR COLLATERAL READING 

Walker ,'Po\it\ca\ Economy, Part II., Chaps. II. and III.; * Mar shall. 
Principles of Economics, Book IV., Chaps. VII., VIII., and IX.; 
^Bohm-Bawerk, The Positive Theory of Capital, Books I. and II, ; 
* Clark, The Distribution of Wealth, Chaps. IX., X., and XI.; 
Nicholson, Principles of Political Economy, Vol. I., Book I., Chaps. 
V. and VI.; *Pzerson, Principles of Economics, Vol. I., Part I., 
Chap. IV.; *Fetier, Principles of Economics, Chaps. 9, 20, and 22; 
*Carver, The Distribution of Wealth, Chap. II. 



CHAPTER VIII 

PRODUCTION: CO-OPERATION AND BUSINESS 
ORGANISATION 

§■ '^'^. Important as is an individual's capacity as a condition Co-opera~ 
determining his productive efficiency, the way in which he Labour 
co-operates with his fellows is even more essential. Alone, a 
man can do little more than keep himself alive even in the 
most favourable environment. Working in co-operation v/ith 
others he so multiplies the results of his toil that he may, if 
other conditions be favourable, provide himself with comforts 
and luxuries as well as with necessaries. 

Three varieties of co-operation may be distinguished: (l) Varieties 
Simple co-operation, that is, the simple working together of operation 
several for the attainment of a common purpose, as when sev- i 
eral unite to move a stone or raise a mast. (2) The division of |'i 
employments, by which each gives his entire time to some one | 
branch of production, such as farming, boat-building, or shoe- ' 
making, and exchanges his products for the products of others. 
This is commonly described as the simple division of labour. 
It is an indirect form of co-operation in that in realising it men 
work together not at the same but at different tasks, expecting 
to share their unlike products by means of exchange. (3) ^ 
The subdivision of tasks in each em.ployment, as when in shoe- 
making one makes the soles, another the uppers, another com- f 
bines them, etc. This may be conveniently designated as the | 
complex division of labour and is the characteristic of the fac- 
tory system. As co-operation it also is indirect. 

Progress in indirect co-operation, or the division of labour, Depend- 
depends upon the development of markets and other facilities ^^^^ °? ^^ 
for exchange. For example, a man cannot be a shoemaker on Devel- 
unless shoes are in demand by people willing and able to pay ^^^g^^s*^^ 
for them. Much less can a shoe factory be organised, with its 
elaborate subdivision of tasks and large output, unless shoes 

137 




I'he 

Influenceof 
Improved 
Transpor- 
tation 
Facilities 



138 Co-operation and Organisation 

can be sold at remunerative prices. From this it may be in- 
ferred that every improvement tending to widen the market 
for goods is favourable to a further extension of the division of 
labour. The truth of this conclusion is abundantly illustrated 
by the history of the last one hundred years. 

Before the era of steam railvv^ays and steam vessels the 
market for most products was necessarily restricted to limited 
areas near the source of supply because of the high cost of 
transportation. Each region had to produce for itself its 
bulkier food articles, building materials, and implements, and 
could import from or export to other regions only those 
products which were light and costly. Under these circum- 
stances the division of labour could be little practised. Coun- 
try districts afforded employment to a blacksmith, a carpenter, 
and a few other specialists. A few cities grew up where those 
goods which could pay the relatively high costs of transporta- 
tion were manufactured. But the majority of the people were 
forced by the conditions to give their attention to agriculture 
as the only means by which they could earn a living. Steam 
and, more recently, electrical transportation have changed this 
situation. At present the cost of carriage offers no serious 
obstacle to the shipment of even cheap and bulky articles, such 
as wheat and coal, half-way round the world. For most goods, 
in place of a merely local market, there are now general 
markets ranging in magnitude from that afforded by a large 
city to that of the whole world. Perishable goods, services, 
and goods for which there is only a local demand, must still 
be produced on a small scale to satisfy local requirements, 
but the proportion of these goods to the whole mass of prod- 
ucts is constantly diminishing. Even fruit and fresh meat have 
ceased to be perishable in the sense that they will not bear trans- 
portation to distant markets. Accompanying this widening of 
markets there has been a concentration of special industries in 
special localities and of business management in fewer and 
fewer hands. In this way full advantage has been taken of 
opportunities for extending the division of labour, with the 
result that the volume of goods produced has enormously 
increased. 

§ 78. Capacity to co-operate depends upon certain well- 



The Advantages of Co-operation 139 

defined qualities as much as does individual capacity to pro- Qualities 
duce. Of these qualities the principal are: (i) honesty, (2) to^Effe^ctive 
steadiness, (3) a spirit of conciliation, (4) ready obedience to Co-opera- 
superiors, and (5) organising ability. The first four are neces- 
sary to the mass of men and will be considered here, the last is 
necessary chiefly to those who assume the task of industrial 
leadership and will be considered in a subsequent section. 

Honesty is indispensable to mutual trust, and co-operation 
cannot be carried far unless men trust one another. Steadiness 
is necessary, because without it a complex division of labour 
would be wasteful rather than economical. When tasks are 
subdivided the performance of each successive one depends 
upon the performance of the preceding. Unless all or nearly 
all the workmen in a factory are present at the same hours each 
day the whole process is disturbed. A spirit of conciliation is 
necessary because working together involves being together, 
and this entails constant friction unless each is willing to make 
concessions. Finally, ready obedience to superiors is essential 
to the success of a complex division of labour, because this in- 
volves planning by one set of people and execution by another. 

These qualities are fostered by the very division of labour to Such ^ 
which they are necessary. In other words, those peoples who DeveloTOd 
have been accustomed to the division of labour longest have byCo-oper 
them most highly developed, while those who have only known 
isolated production are usually lacking in some if not in all of 
them. From this it results that the introduction of a division 
of labour into a new region is particularly difficult, while its 
extension after it has once been established becomes increas- 
ingly easy. The disciplinary value of a complex division of 
labour is clearly shown by the contrast between an industrial 
and an agricultural population. The former is steadier and 
more social, while the latter is more independent and self- 
reliant. 

§ 79. Considering the three forms of co-operation with The Ad- 
reference to the services which they render to production the ^f^^^^^ 
following distinct advantages may be claimed for them : operatioa 

(i) Men working together, as in the building of the 
pyramids, can do things which men working singly could not 
possibly do. 



140 Production: Co-operation and Organisation 

(2) By simplifying the work of each man, a division of 
labour shortens the time needed to master a trade. In place of 
the seven years' apprenticeship once necessary, modern methods 
of production call for but a few months' special training for 
most positions. 

(3) The division of labour offers a varied field for indus- 
trial activity and thus enables each man with special aptitude 
or talent to devote his entire time to the work for which he is 
best fitted. 

(4) By reducing the labour of each man to a few simple 
motions the complex division of labour is favourable to the 
acquisition of great dexterity. Hand and eye come to act 
almost automatically and with a quickness and accuracy unat- 
tainable by a man constantly varying his task. 

(5) The same simplification and concentration of effort is 
favourable to the progress of invention. When work is so 
subdivided that each hand makes but two or three simple 
motions, the time is ripe for the invention of a machine to take 
the place of labour. Thus the goal towards which the division 
of labour is ever tending is the invention of labour-saving 
machinery. 

(6) Co-operation permits the most economical use of land 
and natural forces. Each section may be devoted to the pro- 
duction of that particular good for which it is best fitted just 
as each man may devote his time to his chosen specialty. This 
is called the territorial division of labour and is increasingly 
important as improvements are made in methods of transport- 
ing goods from the place of production to that of consumption. 

The Disad- § go. Against these advantages of co-operation must be 
of Co- ~ weighed one decided disadvantage. Specialisation is narrow- 
operation jjig^ jf i|- requires a man to work long hours with his muscles 
it is likely to cut him off from opportunities to develop his 
mind. On the other hand, if it limits him to an intellectual pur- 
suit it is likely to deprive him of the vigorous exercise needed 
by his muscular system. Specialisation is inimical to that all- 
round development of character and capacity which is the 
natural consequence of varied interests and varied pursuits. 
Carried to excess it unfits men for the enjoyment of that very 
wealth which it helps them in such large measure to secure. 



Other Considerations 141 

Even from the point of view of production, however, excessive 
specialisation does not always result in increased productive 
power. In a world in which goods and processes are con- 
stantly changing special proficiency in any given line of work 
may at any time be superseded. When it is acquired at the 
expense of general development it often leaves its possessor 
actually worse ofif than he would have been without it. No 
group among the unemployed is so hopeless as the highly 
skilled artisans for whose skill the industrial world has ceased 
to have a use. 

In giving full weight to this disadvantage it must not be Other Con- 
overlooked that co-operation, especially as it is developed in 
connection with the factory system, serves to bring specialists 
together and give them the benefit of social intercourse which 
the isolated producer sadly misses. Those who labour in fac- 
tories describe the social aspects of their work as in large 
measure compensating them for the monotony of their simple 
tasks. If increased leisure could be added to the interchange of 
ideas which the factory permits, the evils of specialisation 
would be, if not entirely eradicated, at least reduced to a 
minimum. 

§ 81. It is not easy to show in a statistical way how much Methods 
the world owes to progress in co-operation and the division of °^ Gaagmg 
labour. An important incident of this progress has been, as vantages 
already suggested, the invention of machinery to take the place ^^ ^^'^ 
of specialised labourers, and in those cases where the division 
of labour has been carried furthest machinery now plays such 
a large part that it is impossible to decide what share of the 
productive result should be credited, historically, to each. 
One of the best ways to get an impression of the industrial 
results of the division of labour is to compare the work of a 
hand shoemaker, which may still be observed in many parts 
of the United States, with that performed in a well-organised 
shoe factory. According to an investigation made by the 
United States Department of Labour, the number of distinct 
processes into which the manufacture of men's brogan shoes 
is now divided is eighty-four. Many of these are performed 
by automatic machines. It is calculated that the McKay ma~ 
chine for attaching the soles of shoes to the uppers turns out 



Statistics 
of Pin- 
making in 
1776 and 
To-dav 



Progress 
Greatest 
in Manu- 
facturing 



Business 
Organisa- 
tion 



142 Production : Co-operation and Organisation 

in one hour and thirty-eight minutes one hundred pairs, which 
it would take ninety-eight hours to sew, and twenty-five 
hours even to peg, by hand. From 1855 ^ 1895 the efficiency 
of labour is said to have been multiplied five-fold in the shoe 
industry in the United States through the introduction of a 
division of labour and of improved machinery. 

In Adam Smith's day the best illustration of the division of 
labour that came under his observation was that used in the 
manufacture of pins. He showed that through the division of 
labour the average product of pins to each hand employed in a 
pin factory was 5000 per day and contrasted this with the one 
crude pin a day which a single artisan might perhaps turn out 
if he had to do the whole work by himself. At present pins 
are manufactured by automatic machinery and 1,200,000 per 
workman per day is said to be the output of a well-equipped 
factory. The progress in screw making is even more remark- 
able. According to estimates made by the Department of 
Labour 10,000 screws are now made by an expenditure of 16.7 
minutes of human labour in comparison with 1250 hours for- 
merly required to produce the same number. In this case the 
increase in the efficiency of labour is 4491 fold. 

Similar examples of progress due partly to the division of 
labour and partly to the introduction of labour-saving ma- 
chinery might be multiplied for every branch of manufacturing. 
The subject has been exhaustively treated in a special report * 
issued by the Department of Labour and this may be consulted 
for other striking illustrations of improvement. On the whole 
it is not too much to say that the efficiency of labour in manu- 
facturing has been increased many hundred fold by the aban- 
donment of isolated production and hand processes in favour 
of the division of labour and machinery. In other branches of 
production progress has been less remarkable for the simple 
reason that they are less well adapted to these improve- 
ments. 

§ 82. Business organisation has been carried to such a point 
in modern communities that few persons now produce for them- 
selves the things that they require. Even in country districts 
the typical farmer is no longer the pioneer raising food and 
* Report of 1898 on Hand and Machine Labour. 



Qualities of a Good Entrepreneur 143 

materials for his family, but the producer for the market who 
looks to the market for most of the things that he needs. We 
have called this development " progress in co-operation/' but 
it is evident that the resulting co-operation is not deliberately 
planned by those who participate in it. It arises spontaneously 
as each one follows his own interest without thought of his 
neighbour. As a country district emerges from the pioneer 
stage, different men discover that it pays them better to be 
specialists and to produce for the market than to produce for 
themselves. Thus a simple division of labour is introduced 
to supplement the simple co-operation that prevails even among 
birds and animals. The complex division of labour follows in 
due course because of its superior effectiveness, and in this way, 
as time goes on, co-operative production displaces isolated and 
individual production.* 

The success of industrial co-operation depends in large The En- 
measure upon the ability of business managers, or entrepre- ^reprcBeur 
neurs. These are the men who act as directors of industrial 
undertakings. They decide what shall be produced and how it 
shall be produced. They hire labourers and determine what 
they shall do. They borrow money and convert it into par- 
ticular forms of capital goods or exchange it for land. Finally, 
they assume the risks of the businesses in which they are en- 
gaged, undertaking to pay wages, interest, and rent, whether 
or not the results are satisfactory. 

The qualities needed by an entrepreneur are not unlike those Qualities 
required by a military leader. He must have energy and enter- ^ ^ -, p 
prise. He must be a good judge of men and of conditions, treprenevir 
He must have confidence in himself and be able to inspire con- 
fidence and a feeling of loyalty in others. Above all he must 
have organising ability, that is, the faculty of combining men 
and things in the most effective way for the realisation of a 
desired result. A community that is well supplied with leaders 
having these qualities is sure to have its industrial forces 
turned to good account. Its labourers will be assigned the 

* To distinguish this spontaneous or competitive co-operation from 
the co-partnership of workmen in the management of industrial 
enterprises, to which the term " co-operation " is frequently applied, 
the latter is referred to in this work as " labour co-partnership." 



144 Production: Co-operation and Organisation 

special tasks for which they are best fitted so far as conditions 
permit, and its capital will take the form of the capital goods 
that are found to be most efficient. Invention and discovery 
will be highly appreciated and progress in the technique of 
production will be rapid. Even a few capable entrepreneurs 
may secure these important results for a community. They serve 
the public not only by organising efficiently the special branches 
of industry which they direct, but by setting standards which 
less able men are only too glad to copy. Thus it is not uncom- 
mon in the United States to find whole towns which are literally 
" run " by one or two men. The same men acting in combi- 
nation are coming more and more to control the important in- 
dustries of the whole country, and this gives them an influence 
for good or evil that can scarcely be exaggerated. The greater 
the power of these directors of the community's industries, the 
greater the importance that must be ascribed to personal quali- 
ties in determining the direction of industrial development. 
This importance of personality as a factor in modern business 
was strikingly illustrated in the spring of 1900 when several 
English investors took out insurance policies on the life of 
America's leading financier, to protect themselves in case the 
latter's death intervened to prevent the consummation of cer- 
tain gigantic financial projects of which he was the originator 
and guiding spirit. 
'j'^^'2 § 8^. The simplest form of business organisation is that in 

fcrepreneur which a Single entrepreneur controls the whole enterprise. He 
System jf^^y do everything for himself and use only his own capital, as 

do usually doctors, lawyers, cobblers, etc., or he may employ 
hired workmen and borrowed capital. In the United States 
many businesses employing thousands of men and using mil- 
lions of capital have grown up under the responsible manage- 
ment of single individuals. The advantages of such a one- 
man organisation are obvious. Its disadvantages are that one 
man, however able, cannot be equally competent to direct all 
departments of a large and complex business and that the 
capital that one man can command is small in comparison with 
that which may be secured by a number of men associated 
together. 

These disadvantages are partially overcome in a second form 



Advantages of the Corporation 145 

of business organisation, the partnership. A partnership is an The Part- 
association of two or more individuals who are jointly and "^^^ *^ 
severally responsible for the management of the enterprise in 
which they are embarked. On forming a partnership * the 
partners become individually liable for all of the obligations of 
the firm and agree that any contract entered into by either 
partner in the firm's name shall be binding on all. This form 
of organisation is well fitted for businesses calling for a diver- 
sity of talents and requiring no more capital than a small num- 
ber of men may command. Until the last fifty years it was the 
common form of organisation for businesses that had outgrown 
individual control. Recently it has given way quite largely 
to the corporation, the third important form of business 
organisation. 

A corporation is an association of individuals known as The Cor- 
stockholders who are empowered by legal charter to elect P^^^^^^o^ 
annually a board of directors and through it to act as one per- 
son in the conduct of the specified business. Corporations 
enjoy, usually, perpetual life. They may sue or be sued, incur 
debts, enter into contracts — in short, do everything necessary to 
the conduct of business, within the limits prescribed by their 
charters of incorporation, as though they were individuals. 
The liability of the stockholders in corporations is limited 
usually in the United States to the capital actually paid in or 
pledged in return for stock. Sometimes, as in the case of 
the national banks, stockholders are further liable for a 
sum equal to the par value of the stock they ov/n, but this 
liability is never unlimited as is that of legally constituted 
partners. 

§ 84. The advantages of the corporation for business pur- Advan- 
poses are: (i) It continues even though its promoters die or thf^Cor- 
retire from business. (2) It draws its capital in large or small poration 
quantities from widely different sources and may command 
any amount, however great, for an enterprise in which in- 
vestors have confidence. (3) It may profit by the intermittent 
attention of directors whose ability and experience make their 
services of the greatest value, but who could not be induced to 

* Limited-liability partnerships are not included in this description 
i)ecause they have become an unusual type. 



Its Disad- 
vantages : 
I>iilused 
Responsi- 
bility 



146 Production: Co-operation and Organisation 

assume the risks incidental to partnerships. (4) It is flexible^ 
permitting a complete change of management whenever the 
stockholders deem this expedient, through the simple process 
of an election at an annual meeting. 

These considerations and others of less importance have 
caused the corporate form of organisation to be adopted for a 
great variety of enterprises. It is probably v^ithin the truth 
to say that two-fifths of the business of the United States is 
now controlled by corporations and there is every indication 
that the proportion is increasing. This makes important the 
recognition of certain drawbacks attaching to the corporate 
form of organisation. Chief among these is the fact that re- 
sponsibility for the management of corporations is diffused. 
In one-man businesses and partnerships the men who organise 
and manage the enterprises are the ones most vitally interested 
in their success. In corporations the stockholders, who 
usually furnish all or the greater part of the capital required 
and have to bear the loss if things go wrong, entrust their 
interests to the board of directors. The board of directors in 
turn deputes the actual management of the business to a 
salaried president or manager who may not, and often does not, 
have any further interest in the business than that his reputa- 
tion depends to some extent upon the honesty and wisdom with 
which he manages it. The entrepreneur function is thus 
divided in the corporation between three parties no one of 
whom has the same vital interest in the business that the single 
entrepreneur or partner feels in businesses conducted on the 
other plans. Moreover, few directors or managers have not, 
at times, private interests in conflict with the corporate 
interests they are supposed to promote. This diffusion of re- 
sponsibility and of interest causes corporate management to be 
often wasteful and sometimes corrupt. The salaries paid are 
frequently higher than they need be to secure the required 
grade of labour, appointments are often determined hy personal 
rather than by business considerations, and inflated prices are 
often paid for materials in consequence of the fact that par- 
ticular directors are interested in their production. More com- 
mon than these clear violations of trust are misrepresentations 
io regard to the affairs of the corporation intended to influence 



Disregard of Public Interest 147 

the stock market and to enable those interested to carry through 
some deal for their own benefit. ~\ 

A second abuse is connected with the borrowing power of Misuse of 
corporations. When this power is used to secure money by power 
means of a sale of bonds the law gives to bondholders no voice 
in the management of the corporation so long as the interest \ 

is paid and the principal is not defaulted. The larger the pro- | 

portion of the capital required for any enterprise that is secured '• 

through the sale of bonds, the smaller is the interest in the 
business of the stockholders, who nevertheless continue to con- \ 

trol it. It has often happened in connection with railway cor- 
porations in the United States that the entire capital has been 
secured by selling bonds and that the stock has represented 
simply a bonus paid to the promoters of the company. This is 
a situation fraught with danger, as American experience has 
abundantly proved. To give a fictitious value to their stock 
promoters are only too apt to pay dividends out of earnings 
that should be expended for renewals and replacements. 
Before the corporation is reduced to bankruptcy they can / 

usually sell their holdings to unsuspecting investors and 
retire, leaving to the latter the task of reorganising the 
business. 

A third set of evils has reference to the general or public Disregard 
interest in corporations. Individuals in their pursuit of gain interest 
are controlled by the moral standards of their business asso- 
ciates. Corporations have no moral standards. Their di- 
rectors are willing to wink at practices on the part of the 
officials they appoint to which they would not themselves 
stoop. Corporate officials, moreover, do not hesitate to do 
things in the nam^e and under cover of their corporations which 
they would be ashamed to perform openly for themselves. In 
the United States corporations have been guilty of buying leg- 
islatures, corrupting judges, bribing juries, entering into agree- 
ments with political parties insuring them certain privileges in 
return for campaign contributions, and in fact of every sin in 
the political calendar. It is owing largely to them that the 
tone not only of business but of political morality is so much 
below the standards of private life. This third group of evils 
is at the basis of the " corporation problem," As this is a 



148 Production: Co-operation and Organisation 

phase of the more important " trust problem " its fuller discus- 
sion is postponed to the chapter on Trusts. 

Practical The stockholders of corporations mig-ht from what has been 

Aspects . i o 

of Cor- said be expected to manifest an active interest in their manage- 

poration ment, and this is true of large stockholders who are likely to 
be at the same time directors. Small stockholders, however, 
are very often surprisingly indifferent so long as dividends are 
regularly paid and nothing occurs to excite their suspicion that 
the business is being improperly managed. When a corporate 
enterprise is first launched its stock is likely to be subscribed in 
large blocks by the men most interested in it and most san- 
guine of its success. Some shares may go to the general pub- 
lic, but usually a controlling interest is retained by the men who 
have most to lose if the business fails. During the first year 
or two the stockholders and the active directors are thus apt to 
be identical or so nearly so that risk and responsibility go 
together. Among the directors there is likely to be a guiding 
spirit who performs all the essential functions of the entrepre- 
neur except that others share with him the risks of the enter- 
prise and the minor details of management. After a corpora- 
tion is firmly established on a paying basis the same conditions 
may and often do continue, but it is quite as likely that the 
organisers will gradually dispose of their interests to investors 
so that they may have their capital free for the promotion of 
other enterprises. When this occurs the stock is gradually 
diffused throughout the community until the largest holdings 
represent far from a majority of the outstanding shares and the 
control of the corporation has virtually passed out of the hands 
of the few into the hands of the many. Under these condi- 
tions the control of the business depends not on the actual in- 
vestment of capital in it, but on control over the votes of widely 
scattered and uninformed stockholders. The situation is still 
favourable to the ascendency of some one man of great organ- 
ising ability and much depends upon the moral qualities that 
such a man brings to his position. If he is self-seeking and 
unscrupulous he may pack the board of directors with followers 
of the same stamp and deliberately wreck the enterprise for 
his own aggrandisement. If, on the other hand, he is honestly 
anxious to promote the interests of the company, and brings 



Large- vs. Small-scale Production 149 

ability to his task, he will put in as directors the best men he 
can get and build up an organisation whose efficiency will com- 
pare favourably with that of businesses owned and controlled 
by single entrepreneurs or partners. At each stage in cor- 
porate development the tendency thus appears to be toward 
control by one man or a small group of men, however widely 
the stock may be distributed. Successful corporations are as 
much one-man or few-men enterprises, as regards their actual 
management, as firms composed of partners. The chief differ- 
ence is that corporate entrepreneurs incur but a small part of 
the actual risk of loss that partners incur and must be held to 
the efficient performance of their duties, if at all, by higher 
standards of honesty and faithfulness to trust than are de- 
manded in the latter form of organisation. In spite of the 
many abuses connected with corporate finance in the United 
States the rapid extension of the corporate form of organisa- 
tion is believed to be proof of parallel progress in business 
morality. If directors of corporations were not as a class 
honest and upright men, few large corporations would be 
formed, for the simple reason that few people would be willing' 
to invest their capital in such hazardous enterprises. 

§ 85. Different branches of production var}^ greatly as re- Large- 

gards the size of the business unit which is best adapted to ^■^- S™all. 
° . . ^ scale 

them. In farming in the United States the small farm of from Productioa 

twenty to two hundred acres seems to be displacing the larger 
farm of five hundred acres and upwards. In manufacturing" 
and transportation, on the contrary, large-scale production is 
becoming more and more the rule. The striking merit of small- 
scale production is the undivided attention which it permits the 
entrepreneur to give to all of the details of the business. This 
is particularly important in farming and in artistic and pro- 
fessional work, where continuous attention to matters of detail 
is the chief requisite to success. It is less important in manu- 
facturing and transportation because the operations required 
in these businesses can be reduced to routine and an efficient 
check on the work of employees can be maintained by occa- 
sional attention to what they are doing. In these industries a , 
great variety of contrivances which compel men to register the i 
results of their work as they perform it have been invented, ^ 



Advan- 
tages of 
Large- 
Scale 

Production: 
Division 
of Labour 



Expensive 
Macbinery 



150 Production: Co-operation and Organisation 

and these act as mechanical substitutes for " the master's eye.'* 
Also where automatic machinery is used, the pace is set for all 
operatives and they have to fall in v/ith it or incur the risk of 
being discharged for incompetence. Finally, the system of pay- 
ing wages in proportion to the pieces turned out, or the piece- 
wage system, makes the interest of the labourer as great as 
that of the employer in the efficiency of his work. By these 
methods and others considered in the chapter on Trusts large- 
scale producers in manufacturing and transporting industries 
offset the more careful supervision and attention to details of 
small-scale producers. 

Large-scale producers enjoy besides important positive ad- 
vantages : ( I ) As was pointed out in connection with the dis- 
cussion of partnerships and corporations, they can command 
a variety of different talents and place them in those depart- 
ments for which they are best fitted. This is another way of 
saying that they are able to apply the division of labour even 
to the executive branch of a business and to reap all of the ad- 
vantages that result from it. For a simple business such as 
farming, which because of its periodic character offers con- 
tinuous employment to no specialists, this consideration is of 
slight moment. For manufacturing and transporting indus- 
tries which have several departments going all of the time, 
however, it is very important. 

(2) Large-scale production permits the economical utilisa- 
tion of expensive machinery and equipment which the small- 
scale producer cannot afford, or which it would not pay him 
to have because his small business would not keep it continu- 
ously employed. Farmers surmount this difficulty in a 
measure by owning expensive machines jointly and sending 
them round from one farm to another as they are required. 
Manufacturers can hardly do this because their machinery is 
for the most part stationary. At best it is a poor substitute for 
undivided ownership and control, as all farmers who have tried 
it testify. 

The above consideration applies with special force to the 
transporting industries. Canal and railroad companies require 
expensive excavations and roadbeds. In these a large part of 
their capital is invested, and interest on this capital and expenses 



Can Spend More on Experiments 151 

connected with the maintenance of way constitute a large ele- Advan- 
ment in their expenses. The amount of traffic that may pass Trans- 
through a canal or over a railroad is limited only by the fre- porting 
quency with which boats or cars may safely be sent after each 
other. Moreover temperature changes, storms, etc., determine 
the expense of keeping the system in repair much more than the 
volume of business done. It results from these facts that the 
expense — as regards capital account — per passenger or per ton 
of freight carried diminishes steadily as the volume of business 
grows. The original cost and the outlay for maintenance of 
way appear as fixed charges and the larger the business done 
the smaller is the expense per unit as regards these items. If 
the running expenses per unit are fairly constant, as they are 
apt to be for a well-managed canal or railroad, the large-scale 
transportation company has here a marked advantage over its 
smaller competitor and an advantage which grows as the busi- 
ness grows until the traffic has become so large that it cannot 
be handled without numerous accidents. In the light of these 
two advantages concentration in the transporting industries and 
in many branches of manufacturing seems a perfectly natural 
and economically desirable tendency. 

(3) A third advantage of the large-scale producer is in con- Economy 
nection with the purchase of materials and the sale of products. sunniTes^ 
Sellers of materials are willing often to make concessions to 

large buyers, and in marketing products the large seller may 
arrange his advertising more economically than his small 
competitor. 

(4) Large-scale producers can make a better use of by- Economy 
products. In the mineral oil and the meat-packing industries Connectioa 
large-scale production has made possible the utilisation of waste with By- 
products to an extent undreamed of when these businesses were ^^^ ^^ 
carried on by small firms, and to the advantage of the whole 
community. 

(5) A fifth advantage is found in the large expenditures Can Spend 
which a large-scale producer is able to make on experiments ^^ ^^_ 
looking to the improvement of the technique of production, periments 
In businesses which are changing their methods continuously, 

to be the first to introduce a valuable innovation means often 
the difference between success and failure. Many of the manu- 



Business 

Enter- 
prises 
Classified 



The Repre- 
sentative 
Firm 



152 Production: Co-operation and Organisation 

facturing establishments which have been most successful in 
the United States in recent years, such as the Carnegie Steel 
Company of Pittsburg, have owed their success in no small 
degree to their lavish expenditures on industrial experiments 
and for the installation of new machinery as soon as its superi- 
ority to that in use has been demonstrated. 

§ 86. Large-scale production, it must be clearly understood, 
is by no means synonymous with monopoly or exclusive 
control of a given branch of production. Nevertheless, in 
those cases in which the advantages of large-scale produc- 
tion persist, no matter how large the producing unit becomes, 
monopoly is the goal towards which the business is developing 
and which it will ultimately attain. This suggests a threefold 
classification of industrial enterprises : ( i ) businesses in which 
the small-scale producer has the advantage, as in farming in the 
United States; (2) businesses in which large-scale production 
is more economical up to a certain point, beyond which the loss 
in efficiency resulting from the absence of the direct and per- 
sonal supervision of the entrepreneur more than offsets the 
gains from further concentration; (3) monopolies. In this clas- 
sification the terms " small-scale " and " large-scale " produc- 
tion are used somewhat vaguely, but they serve fairly well to 
distinguish those businesses in which competition persists year 
after year with no sign of abatement, from those in which com- 
petition has ceased or has become so irregular and spasmodic 
that it can no longer be depended upon. 

§ 87. As special chapters are devoted to monopolies it will 
not be advisable to discuss them further at this point. Although 
numerous and perhaps multiplying in the United States, 
monopolies as yet dominate but a small part of the vast field 
of production. Farming, most branches of mining, lumbering, 
fishing, manufacturing, trade, banking, and many branches 
of the transporting industries, are still controlled more or less 
completely by competition. In each of these industries at any 
given time there is a certain size of business plant which under 
average management is most conducive to economical produc- 
tion. This may be designated as the representative firm. As 
methods of production change, the size of the representative 
firm of course changes also, but such changes are gradual and 



Summary 153 

may without serious error be overlooked in connection with the 
consideration of the broader problems of economics. 

The representative firms in each branch of business may, as Compared 
Professor Marshall has suggested, be compared to the full- f^^^ For?s\ 
grown trees of a primaeval forest. Around them and compet- 
ing with them for customers are overgrown firms that are fall- 
ing into decay and new firms that are gradually making a place 
for themselves, just as in the primseval forest overgrown- and 
decaying trees and aspiring young saplings struggle with their 
full-grown brothers for a share of earth and sunlight. And 
just as the trees of full growth are the dominant feature in a 
primseval forest, so representative firms dominate in business. 

§ 88. The contents of this chapter may be summarised as Summary 
follows: The productiveness of labour is increased by co- 
operation, which may take the form either of simple co-opera- 
tion; a division of employments, or simple division of labour; 
or a subdivision of tasks, or complex division of labour. The 
extension of the division of labour is limited by the develop- 
ment of markets and of facilities for transportation. As the 
latter improve, business is concentrated in the most favourable 
situations and the division of labour is made more minute^ 
Ability to co-operate depends on certain qualities and these are 
developed most readily by co-operation itself. Co-operation 
has important advantages, but it has also the disadvantage of 
encouraging excessive specialisation, which must be neutralised, 
if deterioration is to be avoided, by added leisure for the work- 
ing classes. The remarkable increase in the productiveness of 
labour which has been due to co-operation is illustrated in the 
shoe, pin, and screw industries. 

The central figure in business organisation is the entrepre- 
neur and much depends upon his ability and judgment. Three 
principal forms of organisation may be distinguished, the single 
entrepreneur, the partnership, and the corporation. Of these 
the last already dominates at least two-fifths of the business 
carried on in the United States, and this lends special interest 
to a consideration of its advantages and disadvantages. Re- 
lated to the problem of business organisation is that of small 
vs. large-scale production. Analysis suggests a threefold clas- 
sification of business enterprises and leads to the recognition 



154 Production ; Co-operation and Organisation 

of the dominant influence of the representative firm in the first 
two, in which competition is a persistent force. 
Relation In the next chapter we pass from production to distribution. 

Production Both parts of economics deal with the same phenomena, that 
aucl Dis- is^ ^ith wealth creation throusrh the application of labour aided 
by capital to land, but while m production the creation is the 
important thing, in distribution the motives which control men 
and the relation of the parts which different factors play in 
this creation are important because upon them depends the divi- 
sion or sharing of the wealth created. As the analysis pro- 
ceeds it will appear that production and distribution mutually 
determine each other. 



REFERENCES FOR COLLATERAL READING 

^Marshall, Principles of Economics, Book IV., Chaps. VIII. -XIII.; 
Walker, Political Economy, Part II., Chap. IV. ; * Nicholson, Princi- 
ples of Political Economy, Book I., Chaps. VII. -X.; * Fetter, Princi- 
ples of Economics, Chap. 29. 



CHAPTER IX 
PRODUCTION AND DISTRIBUTION 

§ 89. In the preceding chapters the products of industry Distribution 
have been referred to sometimes as commodities and services, pirst with 
sometimes as economic goods, and sometimes as valuable utilities. Money 
It is these same commodities and services, goods, or utilities, 
that are the objects of distribution. If the identical goods pro- 
duced were directly and immediately divided between those 
who take part in their production, the matter would be com- 
paratively simple. But such production " on shares " belongs 
to a primitive stage of industrial development. Under modem 
conditions, goods are produced for sale, and it is the money 
or purchasing power received for them, rather than the goods 
themselves, that is the first concern of distribution. Con- 
sider, for example, the case of a typical business establish- 
ment like a shoe factory. The manager of such an enterprise 
would never think of compensating his employees or others 
who have claims upon him with pairs of shoes, the product 
of his business. Instead, he sells the shoes as they are pro- 
duced for the best price obtainable, and the money or purchas- 
ing power he receives for them is what he really divides be- 
tween those who have claims upon the product. 

In determining what the product has been, and, therefore. The Re- 
what is the money return to be divided, it must be remembered puud'^s 'dc- 
that not all the new commodities and services produced during ducted from 
a year are to be credited to the year's industry. In connection Return to 
with nearly every branch of production there is a destruction of !^^*^^j°^^*^^ 
commodities and services for which full allowance must be income 
made in the gross product before the net product, or what has 
really been added to the wealth of the world, can be calculated. 
The farmer uses up seed, fertilizers, tools, and farm buildings. 
The manufacturer destroys raw materials, fuel, machinery, and 
factories. Even the banker and professional man use up 

155 



156 Production and Distribution 

stationery and office furniture. These losses and wastes, which 
are a necessary part of all production, must be met by the 
deduction from the gross returns of the year's business of what 
we may call a replacement fund. Through this fund raw 
materials and partially finished products destroyed or altered 
in form are replaced; buildings, machines, tools, and other 
things subject to wear and tear are repaired and renewed; and, 
finally, provision is made for substituting for worn-out ma- 
chines and other equipment, new capital goods of at least equal 
efficiency. The deduction to be made from the gross product 
for the replacement fund is calculated as a sum of money or 
purchasing power. In our shoe factory, for example, the capi- 
tal goods used up in the process of production cannot be re- 
placed literally out of the product. It is not shoes that are 
needed, but leather, tools, repairs on building and machinery, 
etc. The expense of making these replacements and repairs 
is calculated in money and deducted from the gross money re- 
turn from the year's business. The net money return which is 
left, and which we shall designate in future as the money 
income, is the first object of the distributive process. 
Distribution § go. But if money or purchasing power is the first thing 
Income distributed, it is only as a means to an end. Those who take 

Merely a p^rt in production desire not money, but want-satisfying goods. 
Distribution To determine what is really distributed, we must inquire what is 
In^m bought with this purchasing power, for this is the 7'eal income. 

If we consider the question with reference to the whole indus- 
trial community, it is obvious that the money income that is 
derived from the products of industry must be spent in turn 
for the products of industry. We may go even further, and say 
that as regards industrial society as a whole, it is virtually the 
net product itself that is bought with the price of the net prod- 
uct, and that is, consequently, the ultimate object of distribu- 
tion. Certain facts about the present organisation of industry 
seem to contradict this conclusion, and to these we must give 
careful consideration before regarding it as established. 
Darable The first complication has to do with a source of income of 

tion Goods which nothing has yet been said, that is, with the valuable 
Contribute utilities that are gradually given off by durable consumption 
Income goods. The business man distinguishes sharply in his thought 



The Net Product 157 

between capital goods, the instruments of production, and 

consumption goods, the instruments of want-satisfaction. He 

thinks of a man's store or warehouse as contributing to his 

annual income, but rarely of his house or his furniture as doing 

the same thing. But if we accept, as we logically must, the view 

that the fruits of production and the objects of distribution are 

simply valuable utilities, we are bound to take into account in 

the distributive process the utilities that come from durable 

consumption goods. Houses contribute to real income just as. 

much, if not in quite the same way, as warehouses. So do auto- ' 

mobiles, steam yachts, and the countless other things in the 

same class. But if durable consumption goods, themselves the. 

products of the industry of years, or even decades, gone by, con- • ' 

tribute a portion of the valuable utilities that are purchased with 

the money income from the year's business, what becomes of 

the proposition that what is divided up or distributed is virtually 

the net product of the year's business itself? This is merely a 

phase of a larger difficulty, to which we shall next proceed,' 

and in answering which we shall suggest the answer to the; 

above question. 

§ 91. Capitalistic production, as already explained, differs The Net 

from direct production principally in the longer interval that Consists 

must elapse between its inception and its completion. As now Mostly of 

. , , . . , , . , ^, , Unfinished 

organised production is a prolonged, serial process. 1 hus the Goods 

bread that appears on the table to-day was made from flour 
produced weeks or months ago. This flour was itself made 
from wheat grown perhaps a year before. Finally, the seed' 
from which this wheat sprang was planted six months earlier.' 
And what is true of bread is true of practically every commod- 
ity that enters into consumption. Only services which must 
be enjoyed. If at all, as they are rendered, are consumed as they 
are produced. It is possible only to guess at the proportion 
of the valuable utilities embodied in the commodities and serv- 
ices consumed in an average week which were produced dur- 
ing that week, but it is safe to say that not more than one- 
tenth are in this class. Quite nine-tenths are the products of 
the industry of previous weeks, carried along to the present 
week as a part of the community's capital. Since not more 
than one-tenth of the utilities currently consumed are products 



158 



Production and Distribution 



The Rea? 
Income of 
Goods 
Ready for 
Consump- 
tion 



The Picture 
of a Society 
in the State 
of Normal 
Equilibrium 



of current industry, most of the world's workers must be en- 
gaged at any given time upon commodities that will not be 
ready for consumption until some future period. That this is 
the case is at once obvious from a consideration of the limited 
number of occupations concerned with the rendering of services 
and with applying the final touches to the commodities that 
enter into every-day consumption. Retail dealers, deliverers, 
cooks, bakers, etc., constitute but a fraction of the industrial 
population of any modern community. 

Opposed to the fact that fully nine-tenths of the products 
of current industry are not in consumable form is the equally 
certain fact that practically the entire money income is spent 
for goods that are ready for consumption. Of course, some in- 
come is saved and invested, but the great bulk of it, whether 
received by wage-earners, employers, or capitalists, is spent, 
and spending means purchasing finished goods immediately 
available for the satisfaction of wants. We are thus seemingly 
brought to the conclusion that it is not, speaking broadly, the 
products of their own industry that are shared among those 
who take part in production, but the products of past industry.. 
If we think of the products of industry as pouring into a reser- 
voir, we must think of real income as being drawn out of tlie 
reservoir on the other side, and as consisting for the most part 
in any day, week, or month of different goods from those which 
during that day, week, or month have been produced. Since the 
contents of the reservoir is a part of the community's accumu- 
lated fund of capital, we may formulate our conclusion in the 
proposition that real incomes, the commodities and services for 
which money incomes are exchancfed, come for the most part 
out of capital, rather than out of the net product. 

§ 92. The reconciliation of the proposition just ad\^anced 
with that previously laid down, that virtually it is the net 
product itself that is the final object of the distributive process, 
can most easily be explained by considering the relation that 
would exist between the net product, the money income, and 
the real income in an industrial society stripped so far as pos- 
sible of all complicating and irrelevant phenomena. To picture 
sucli a society let the reader imagine that all improvements in 
productive processes are for the time being suspended; that 



The State of Normal Equilibrium 159 

nature assists production without the slightest variation from 
season to season ; that each grade of labour is self-renewing 
and self-perpetuating, while the population as a whole is station- 
ary ; that the fund of capital is kept intact through exact renewal 
by means of the replacement fund ; that the wants of consumers 
do not change ; and, finally, that competition has perfectly free 
play. Under these circumstances production, distribution, and 
consumption would go on very much as they do in actual 
society, except that in the absence of all change, each would be 
perfectly adjusted to the others. At every stage of production 
there would have to be an exact replacement from the previous 
stage of the capital goods destroyed. Thus, if the week were 
the unit production period, the week's destruction of tools, 
machines, and other instruments of production must be just 
made good by the week's flow of finished capital goods from 
dealers to the different -stages of production. The week's out- 
put of raw materials must just replace the worked-up materials 
which manufacturers pass on each week to traders. These 
latter must just balance the week's transfers of goods from 
wholesale dealers to retailers, and the latter must in turn just 
ofifset the week's sales by retailers to their customers. 

Under these conditions the net product and the real income In Such a 
of consumable goods must be identical as regards both the kinds NeTprodutt 
and the quantity of valuable utilities of which each is composed, and the 
and the money income must exchange indifferently for either, ^j-g inter- 
This must be the case, because it is only on this condition changeable 
that the exact replacement all along the line necessary to the il- 
lustration could occur. The only difference between the net 
product and the real income would be that the former was made 
up of valuable utilities not yet brought together in those combi- 
nations desired by consumers, while the latter consisted of 
exactly similar valuable utilities combined in finished products. 
If we describe the situation resulting from the above as- 
sumptions as that of normal equiMhritim, we may conclude that 
for an industrial society brought to the state of normal 
equihbrium, our proposition that it is virtually the net product 
itself that is distributed as real income to those who take part in 
production is fully justified. 

Of course, no one of the assumptions upon which the 



i6o Production and Distribution 

Actual imagined society rests is fully realised in any actual society, 

Socie\T ^^^ ^^^ there is more in common between it and actual indus- 
Tends trial societies than might at first be supposed. The dominant 

Tow^ards the characteristic of the latter looked at in their entirety is not 
State of change but permanency and stability of relations. Men drop 
Eqiim^rium *^^^' ^^^ Others inherit their tasks and perform them much as 
they did themselves. Population is not stationary, but it is so 
nearly so from year to year that the great majority of the chil- 
dren born each week virtually take the places of persons who 
have just died. Goods are worn out and destroyed, but new 
goods are being produced in a continuous stream, so that the 
aggregate wealth of society changes little over short periods 
either as regards its amount or the kinds of goods of which it is 
composed. In the same way improvements in methods of pro- 
duction, if all processes are considered, follow each other but 
slowly. Moreover in every society, no matter how rapidly 
it is progressing in population, wealth, or the technique of pro- 
duction, economic forces are constantly working towards the 
state of normal equilibrium. 
^®^ ^To" I^or these reasons the proposition that the net product and 

Income Ap- the real mcome are exact duplicates of one another applies with 
Inte^"^^*^^^^ but slight modification to actual societies. In the United States 
changeable to-day, for example, as in the hypothetical society, the greater 
United P^*^*- ^^ ^^^ wealth withdrawn each week from dealers' stocks 

States to constitute the real incomes of sharers in distribution is re- 

placed in kind and quantity by the net product of the week's in- 
dustry, in the same way that the water which flows through a 
mill-race from a pond kept at a certain level is replaced by the 
water which flows from the mill stream on the other side. As 
in the latter case we may say that the water which propels the 
mill wheel during any hour is virtually the water that flows 
into the mill pond, so we may say in the former that real in- 
comes come virtually from the net products of industry. In 
both instances there is the same necessary connection between 
tlie inflow and the outflow. 

The assumption of a state of normal equilibrium is a conve- 
nient logical device for disentangling normal and permanent 
influences and their effects from transient influences and the 
confusing situations to which they give rise. In this con- 



Graphic Illustration 



i6i 



nection it helps to make clear the fact that notwithstanding 
all of the complexities of actual industrial relations it is still 
substantially true that the net product of industry from day to 
day and week to week is the source of the real incomes of those 
who take part in production. This is an important clue to aid 
in the solution of the problem of distribution, and it is the task 
of the following chapters to follow it to its logical conclusion. 

§ 93. It may help to make the propositions that have been Graphic 
explained in the preceding sections more intelligible if we at- tion'of the 
tempt to present them in graphic form. The following figure Foregoing 
represents the relations between the net product and the real 
income in an industrial society brought to the state of normal 
equilibrium : 




Fig. 6, 

In this diagram are represented in successive and connected 
•compartments the three great branches of production: the 
extractive industries,* manufacturing, and transportation and 
trade. Raw materials, the products of the extractive industries, 
flow through from left to right, being enriched as they pass 
along by the addition of form, place, time, and possession utili- 
ties. On leaving the hands of dealers, they are separated into 
two great streams, one, the replacement fund, which flows back 
to repair and renew capital goods worn or destroyed in the proc- 

* This is the term applied to hunting, fishing, stock-raising, farming, 
forestry, mining, and quarrying, since they are concerned for the most 
part with securing materials directly from nature. 



1 62 Production and Distribution 

€ss of production, the other, consumption goods, which begin 
immediately to satisfy wants. The latter stream is again sub- 
divided, one branch conveying the second and subordinate 
replacement fund needed to repair and renew the durable con- 
sumption goods whose presence is indicated at the top of the 
diagram and which give off a continuous stream of utilities 
to mingle with those afforded by transient consumption goods, 
the other and larger branch into which the main consumption 
goods stream is divided. The net product represented in this 
diagram consists in part of raw materials, in part of manufac- 
tured goods, finished and unfinished, and in part of the utilities 
subsequently added at the stage " transportation and trade." 
Only a very limited part is sufficiently advanced to be flowing 
out with the stream of consumption goods to minister directly 
to human wants. On the other hand it is in this stream of con- 
sumption goods that the entire real income for which the money 
income is exchanged is found. Although the identical goods 
constituting the real income are thus for the most part other 
than the goods constituting the net product, the latter consists 
of exactly similar utilities quantitatively and qualitatively 
as the former. At each point the streams of goods flow on 
evenly and unbrokenly so that the " transient consumption 
goods " that are allowed to escape, and which constitute the real 
income, are exactly replaced by the goods included in the net 
product. The diagram thus represents movement without 
change. It depicts the circulation of goods that is going on 
in actual industrial society with the elements of change and 
monopoly eliminated. 
The § 94. A convenient bridge for passing from the problems 

PTOducTion^^ *^^ production to the problems of distribution is furnished by the 
Defined expenses of production. As used in these pages this term in- 
cludes every item of outlay which producers must normally 
and regularly incur to put goods on the market and effect their 
sale and also such compensation as producers normally and 
regularly require as the condition to their continuing to serve 
industrial society in the capacity of entrepreneurs. These items 
are as follows : ( i ) outlays for materials, wear and tear of 
buildings and machinery, etc., or the replacement fund; (2) 
premiums paid for the insurance of capital goods; (3) interest 



Items in the Expense of Production 163 

for the use of capital ; (4) wages to labourers of all grades ; (5) 
rent of land and natural power used in production; (6) taxes; 
(7) minimum profits to the entrepreneur to remunerate him for 
his own time and trouble. 

The first item calls for no further explanation. As a matter The Re- 
ef course every business man deducts a replacement fund from ^^q^"^^^ 
the price he receives for his products. Premiums for insur- 
ance, looked at broadly, are merely additional expenses for the 
replacement of capital and may properly be included in the first 
item. Insurance companies learn by experience what proper- Insurance 
tion of the particular kinds of capital goods they insure is likely ^r®"^i^"'^s 
to be destroyed in a normal year. They charge rates which 
will enable them to replace losses and at the same time make 
some profit for themselves. When organised on the mutual 
plan, as is increasmgly common, their character as agencies for 
the co-operative replacement of capital goods liable to destruc- 
tion through accident is clearly apparent as the element of profit 
is then eliminated and the officials of the company appear as the 
employees of the insured for whose sole benefit the business is 
carried on. 

The item of interest for the use of capital is calculated at a Interest 
certain rate per cent, per annum for the capital employed. 
Thus if a business ties up on the average throughout the year 
capital goods worth $10,000 and the current rate of interest is 
five per cent., $500 should be charged as expense for interest. 
This item appears whether in the particular business considered 
borrowed capital or capital belonging to the firm is used. If 
the former is the case the expense for interest is an actual out- 
lay, if the latter it is a virtual outlay, since using the capital in 
the business prevents loaning it at the current rate to some 
other entrepreneur. 

The propriety of naming wages as one of the items of ex- Wages 
pense is obvious. As the term is here used it includes all pay- 
ments for labour, whether wages in the ordinary sense or sala- 
ries. It is convenient to go even further and to include in it 
the seventh item enumerated above, the minimum profit re- 
ceived by the entrepreneur, on the ground that the latter is 
merely a wages of management and as appropriately included 
in wages, although paid by the entrepreneur to himself, as is 



164 



Production and Distribution 



Rent 



Taxes 



Summary 



Differences 
in Ex- 
penses of 
Production 



the interest charged for the use of a firm's own capital in- 
cluded in interest. The amount that should be charged as 
wages of management or minimum profit is what the entrepre- 
neur could obtain for his services if he worked for wages or for 
a salary for a corporation or other employer. Unless he nor- 
mally obtains this at least from the business he carries on, he 
will give it up and become a wage-earner or salaried ofjficial. 

The rent of land or natural power was spoken of in Chapter 
VI. as a profit over and above the expenses of production. To 
the farmer cultivating his own land it is an item of return 
rather than an outlay ; but the same reasons that cause econo- 
mists to include an allowance for interest on a firm's own capital 
and for wages to the entrepreneur himself among the ex- 
penses of production, lead them to treat rent also as an 
expense of production. To the entrepreneur using leased land 
rent is an expense. If instead he uses land which he himself 
owns it is virtually an expense because by using it he loses the 
rent he might have obtained had he leased it to another. As 
already stated, rent is a variable item to dififerent producers, 
depending on the quality and situation of the lands they use. 
It does not appear at all among the necessary outlays of so- 
called marginal producers. But the land or natural power that 
can be used free of charge is of poor quality and most producers 
find rent an important item among their expenses. 

Taxes are another irregular charge from which many pro- 
ducers are exempt. Their amount depends upon the arbitrary 
decision of the taxing- power and for this reason and because 
they do not afifcct at ail many branches of production we may 
leave them out of account in our treatment of distribution. 

Summarising the results of the preceding discussion it ap- 
pears that the items in the expense of production may be re- 
duced to four: (i) Expense for replacement or maintenance 
of capital goods, (2) interest, (3) wages, (4) rent. 

§ 95. The expenses of producing commodities of each sort 
are different for different firms. For new firms just establish- 
ing business connections and not yet ready to produce on the 
scale that experience has shown to be most economical, ex- 
penses are high. They are high also for old firms that are 
overgrown or for some other reason are falling into decay. 



The Normal Expenses of Production 165 

They are lowest for the representative finns which have at- 
tained just the size conducive to economical production. Dif- 
ferences might be expected to arise also from differences in the 
quality of the land and natural power used and in the abilities 
of entrepreneurs, but it must be remembered that these are 
fully covered by the items rent and wages of management in- 
cluded in the expense of production itself. For example, if 
two equally able farmers produce wheat for the same market 
and the first obtains in normal years twenty-five bushels to the 
acre for a given outlay of labour and capital and the second 
only twenty bushels for the same outlay, the difference must be 
due to differences in the fertility of the areas cultivated and 
should be credited to the better land as rent. If the cultivator 
did not own the better land or if he decided to lease it to some 
one else the equivalent of this difference in product might 
actually be required as the proper rent per acre of the better 
farm over and above the rent that must be paid for the other. 
In the same way able entrepreneurs whose careful planning 
and wise supervision keep down the other expenses of produc- 
tion require proportionate compensation in higher wages of 
management. Such men know pretty well what their services 
are worth and unless their occupation rewards them ade- 
quately will turn to something else. 

The expenses of production of the representative firm are the The 
normal expenses of production, and so long as competition re- Expenses of 
mains an active force they determine the normal price about Productioa 
which, as already explained, the market price of each competi- 
tively produced commodity tends to oscillate. The market 
price cannot fall for any length of time below the expenses of 
production to a representative firm, for under such circum- 
stances representative firms suffer losses and proceed to curtail 
production until demand for the diminishing supply of the 
commodity brings its price back to a remunerative level. The 
market price cannot rise for any length of time above them 
because then all representative firms will be making an extra 
profit and some will seek to secure more of it by enlarging the 
volume of their production. Supply will be increased and this 
in time will bring the price down to the old level or force it 
below it. Or, looking at other effects, as the price falls be- 



1 66 Production and Distribution 

low the expenses of production to the representative firm de- 
caying firms are forced into bankruptcy and new firms are so 
discouraged as to withdraw from the business and in this way 
supply is lessened. On the other hand a rising price not only 
encourages tottering firms to keep up the struggle but induces 
new firms to enlarge the capacity of their plants for the double 
purpose of selling more at the high price and of realising the 
economies of large-scale production. In these ways the supply 
is increased and the price is brought back to the normal, 
j^ctive It must be carefully noted that the above reasoning assumes 

Competition j^q|. ^j^jy active competition but the absence of change as re- 
gards the expense of production per unit of product which 
representative firms incur. If conditions are changing so that 
these expenses vary constantly even the most persistent com- 
petition may fail to cause the price of the product to corre- 
spond accurately to the normal expenses of production. It 
would tend always towards such correspondence, but it might 
never attain to it. 
Normal Normal prices for competitively produced goods just cover 

Prices Just ^j^g expenses of their production — the allowance for the replace- 
Normal ment of capital goods, interest, wages, and rent. As a usual 

ProcfuctloiT ■^^^"S these four items of expense are incurred by the entrepre- 
neur before production is concluded and before he knows what 
prices he is going to get for his products. He buys his mate- 
rials, tools, machinery, and other capital goods at current prices, 
he borrows capital to pay for them and perhaps to pay wages 
at current rates, he hires labour and leases land on the terms 
fixed for him by general market conditions rather than on his 
own terms, and all of these arrangements are entered into be- 
fore the product is ready for sale. It is in this contracting to 
pay the expenses of production before the product is ready 
for sale or the price to be received for it known that the princi- 
pal risks of business which it is the entrepreneur's function to 
incur consist. If prices are normal the representative firm, re- 
ceives from its sales just enough to cover its expenses of pro- 
duction including an adequate wages of management. Any 
deviation from the normal means extra profit or unexpected 
loss to the entrepreneur or to stockholders who are the risk- 
takers in corporate enterprises. 



Limits to Theory of Distribution 167 

The market prices of goods may differ from the normal Reasons f<^«* 

J. , ^, , r J • ii Deviation of 

prices correspondmg to the normal expenses of producmg them, Market from 

cither because conditions are changing and competition has not Normal 

yet adjusted supply to demand at the new normal price level, 

or because competition is itself absent and monopoly stands as 

a barrier to such an adjustment. In the former case we have 

to do with what we may call a net or competitive profit (or 

loss) ; in the latter vnth monopoly profit. 

§ 96, From the point of view of production rent, v/ages, and 'i^h® 

Interest are expenses while competitive and monopoly profits Between 

are surpluses due to deviations of market prices from the nor- Pi'oduction 
. ... and Distri- 

mal. From the point of view of distribution all five are shares butiou 

into which the net product of a country's industries, that is, 
the gross product less the deduction required to replace and 
maintain the fund of capital goods, is divided. It is the task 
of the theory of distribution to explain what causes, at last 
analysis, determine the size of these different shares. In the 
following pages we have attempted to prove the thesis that 
competition tends to secure for each factor in production a 
share of the product equal to what it itself produces. Every cir- 
cumstance which causes market to diverge from normal prices 
interferes with this result and occasions profit or loss to entre- 
preneurs above or below their proper wages of management. 
The chapters on Net or Competitive Profits and on Monopoly 
Profits discuss the circumstances that may catise such diver- 
gence and the shares of income to which they give rise. The 
chapters which follow on Rent, Wages, and Interest attempt to 
show that each tends to be the share of the normal price corre- 
sponding to what the factor concerned contributes to produc- 
tion. Finally the concluding chapters on Value and Distribu- 
tion recapitulate the explanation in more general terms and 
attempt to clear up difficulties and answer objections. 

An explanation of the causes that determine the shares into Many 

- Causes of 
which the net product is divided is by no means a complete wealth and 

account of the influences which make some men rich and others f "'^^^^'f>', °°*^ 

_, r- Included in 

poor. There are a great many circumstances that affect the Theory of 

distribution of property that are uneconomic in character. For Distribution 

example, no one factor is more potent in deciding that some 

shall be rich while others are poor than the inheritance of 



1 68 Production and Distribution 

wealth. On this topic the economist should have something 
to say,* but it is not a matter that can be treated profitably in 
a theory of distribution. In the same way the philanthropies 
of public-spirited citizens in endowing art galleries and other 
institutions for public enjoyment and instruction and the 
intelligent expenditures of municipalities in supplying free 
schools, playgrounds, and parks, contribute important elements 
to the real incomes of the inhabitants of every community, but 
these contributions are not subject to economic law. The 
theory of distribution is necessarily limited to the division of 
the product among those who on one ground or another have 
an economic claim. It must be supplemented by a study of 
many other factors to give that complete understanding of the 
causes of wealth and poverty which all of us desire to have, 

REFERENCES FOR COLLA TERAL READING 

'•'■■Clark, The Distribution of Wealth, Chaps. II. -VI.; ''Fetter, The 
Principles of Economics, Chaps. 6, 30, 42, and 43; * Marshall, Princi- 
ples of Economics (fourth edition), Bk. VI., Chaps. I. and II,; 
*Carver, The Distribution of Wealth, Chap. III. 

* Cf, Sections 316, 323, 324, and 333. 



CHAPTER X 
DISTRIBUTION : NET OR COMPETITIVE PROFITS 

§ 97. As an introduction to an analysis of the causes of net The Wages 
or competitive profits, a more exact description should be given °^ J^an- 
of the " wages of management." As business is now organised 
in progressive countries there is a demand for hired workers 
possessing every variety of ability. From the forty cents a 
day paid to wage-earners in certain occupations in the United 
States to the $100,000 a year paid to the president of the 
United States Steel Corporation is a long step; but these and 
all intermediate earnings of hired workers are to economic 
analysis simply wages paid for services rendered. Nearly if 
not quite as comprehensive as the wages scale is the scale of 
entrepreneurs' earnings or wages of management. All but the 
very lowest groups of hired workers have among them indi- 
viduals who may, if they choose, set up in business for them- 
selves. Even sweat-shop employees have as an alternative 
occupation peddling, in which they assume the risks of loss. 
Agricultural workers may become homesteaders or in the more 
settled portions of the country may rent small plots of land to 
cultivate at their own risk. Similar but more numerous 
alternatives are open to the higher groups up to the highly 
paid managers of large corporate enterprises, any one of whom 
could with his superior executive ability direct either of a num- 
ber of businesses successfully. 

When a man who is or might be earning a certain wage or The Wages 
salary as an employee, chooses instead to figure as an inde- °^ Manage- 
pendent entrepreneur, it is reasonable to assume that he ex- a Minimum 
pects to better his condition. He may make the change be- ^^^?Y 
cause he loves independence or because the new occupation is Profits Will 
more congenial, but he is not apt to make it unless he expects Length ^'f^ 
also to realise the same or higher earnings than in the other Time Fall 
position open to him. The wage or salary that might be ob- 

169 



lyo Distribution: Net or Competitive Profits 

V tained is thus a minimum profit or wages of management that 

must be paid to the entrepreneur in order to secure his services 
in connection with his entrepreneur function. At any given 
time the members of any group of workers may be distin- 
guished into three types : ( i ) men and women who do well as 
employees, but have not the enterprise to set up in business for 
themselves, (2) men and women who are planning to become 
entrepreneurs and are only waiting for favourable opportunities 
to begin,. (3) men and women who have been entrepreneurs, 
but have been compelled through failure to return to the 
ranks of hired workers. Individuals of the first type exert 
little influence on the earnings of their group. They ac- 
cept what industrial conditions enable them to get. Those 
of the second and third types, on the other hand, are impor- 
tant factors in determining the amount of these earnings. 
The former are constantly studying other industrial oppor- 
tunities and through their readiness to abandon the positions 
which they have in order to launch out as entrepreneurs, the 
rate of wages for their group is prevented from falling below 
the earnings of entrepreneurs of the same grade. More impor- 
tant for our present purpose is the conduct of persons of the 
third type, who have resumed their posts as wage-earners 
because their earnings as entrepreneurs have ceased to equal 
even the wages that they can obtain in such positions. Their 
ready return to the ranks of employees prevents entrepreneurs' 
earnings from falling except for brief periods below the wage 
level. 
The Wages Xhe wages of management has been defined as the wages or 
aient May " salary which an entrepreneur might earn by working for hire. 
Be a Very jt is larg-e or small according- to the grade of labour for which 



"Large Sum 



the entrepreneur is fitted, and may equal only the dollar or less 
a day of the itinerant peddler or organ grinder or the $100,000 
a year of the salaried manager of a billion-dollar corporation. 
Arguing that free competition tends to keep the earnings of 
entrepreneurs down to bare wages of management, does not, 
therefore, imply that these earnings are scanty. Bare wages 
for the efficient manager of a gigantic corporation constitute 
a princely income. It simply recognises that wages of man- 
agement are governed by the same law that controls wages 



The Power of Substitution 171 

generally and that for this reason they require no separate 
explanation. 

§ 98. In this chapter we are confining attention to net or Conditions 
competitive profits. To understand the origin of such profits ^*J^/„** 
one must appreciate clearly the limits to the power of the indi- trepreneur 
vidual entrepreneur over the conditions under which he carries 
on business. In the first place the entrepreneur's influ- 
ence over the prices at which he buys materials and other 
capital goods and at which he sells his products is deter- 
mined largely by general market conditions. In a progressive 
society in which prices are constantly fluctuating he may, if he 
be both shrewd and lucky, buy more cheaply and sell more 
<Jearly than his competitors, but this is through taking advan- 
tage of fluctuations, rather than through creating them. Sec- 
ondly, the rents he must pay for pieces of land and the rates of 
wages and of interest he must pay for his labour and capital 
are determined by general conditions and are largely beyond 
his control. This does not mean that it is not possible for an 
•employer, sometimes, to take advantage of the inertia of his 
work people to cut wages, but merely that if he does so while 
wages paid by other firms remain as before he will begin to 
lose his best men even if he does not precipitate a strike. In 
general entrepreneurs must pay current rates for the factors 
of production they employ. Although limited in these two 
particulars, the entrepreneur enjoys full independence in de- 
ciding what goods he shall produce, what quantity he shall 
produce, and by what methods he shall produce. 

§ 99. Of all the liberties of the individual in industrial so- The Power 
ciety, the most precious is the liberty to substitute one thing of Substi- 
for another or the power of substitution. At present we are 
concerned with this power as exercised by entrepreneurs. The 
substitutions open to them are of two kinds. First, there are 
substitute uses to which the different factors of production 
may be put. Pieces of land may be used for different crops or 
building sites, workers may be employed at different tasks, and 
capital goods, except those that are highly specialised, may be 
made to aid production in different ways. In general entrepre- 
neurs tend to devote each particular factor to that use in which 
it affords the largest return. Second, there are substitute com- 



The Source 
of Profits 
above the 
Wages of 
Manage- 
ment 



Price 
Fluctua- 
tions a 
Source 
of Profits 



Ex- 
planation 



172 Distribution : Net or Competitive Profits 

binations of the factors of production that may be made for 
the accomplishment of the same productive purpose. For 
example, dirt may be moved by many men with little capital 
in the form of hand shovels or by few men with much capita! 
in the form of steam shovels. Shoes may be made largely by 
hand or largely by machinery. A given crop may be raised on 
one piece of land without capital in the form of special ferti- 
lisers or on another with fertilisers. In deciding between. 
these and alternative combinations entrepreneurs tend to 
choose the ones that are cheapest in the given situations. 

If all changes were suspended entrepreneurs would use their 
power of substitution until each factor was assigned to that 
branch of production in which it afforded the largest return 
and until in each branch of production just that combination 
of factors was made which was found to be most economical 
under the given conditions. As a result industrial society 
would be brought to a state of normal equilibrium. All prices 
would be stable ; production, distribution, and consumption, 
would follow each other with undeviating regularity, and the 
profits of entrepreneurs would just cover their wages of man- 
agement. In actual industrial society, far from being sus- 
pended, changes are of frequent occurrence. Prices are un- 
stable; new goods are invented and put upon the market; 
methods of producing old goods are improved, and the supplies 
of the factors of production increase or diminish. Each one 
of these changes causes a modification in the earnings of the 
entrepreneurs affected and gives rise to the extra gain or loss 
which we call net or competitive profits. 

§ 100. One of the most frequent causes of profits or losses 
to entrepreneurs are unexpected changes in the prices of the 
goods they buy or sell. Such changes may be due to influences 
affecting the dem.and for such goods or their supply, or they 
m.ay be the result of a rise or fall in the value of money, the 
medium in which prices are quoted. In the former case they 
affect chiefly the one good in which the entrepreneur is inter- 
ested ; in the latter they affect all goods and may be the cause 
of general prosperity or general depression. 

The way in which price changes affect profits is obvious. 
Every entrepreneur in making his calculations estimates that 



Efforts to Control Prices 173 

he must pay certain prices for the materials, etc., that he uses 
and that he will receive certain prices for his products. If 
prices change after he has begun his business so that he has 
to pay more for his materials or so that he receives less for 
his products, the difference comes out of his expected profits. 
If, on the other hand, the prices of materials fall, or the prices 
of finished products rise, there is here an unexpected extra 
gain to be added to the profit which he counted upon 
receiving. 

Price oscillations have becomic such a familiar condition of Efforts to 
competitive business, and the uncertainty they introduce into p^^^^^ 
business calculations is so distasteful to conservative entrepre- 
neurs, that many expedients are resorted to to confine them 
within the narrowest possible limits. Perhaps the most com- 
mon are agreements among producers to maintain prices for a 
specified period. Such agreements range all the way from 
verbal understandings which may be broken by simple notice 
on the part of one of the contracting parties, to formal combi- 
nations which substitute monopoly for competition as the regu- 
lator of prices. To be effective the latter must be supplemented , 
by machinery for curtailing or enlarging production so that the 
supplies offered at the established prices may always just 
satisfy the demand. As forms of monopoly such combinations 
are discussed in later chapters. 

Although mere agreements as to prices lessen the frequency The Conse- 
of fluctuations they do not lessen their extent. On the con- ?]"g p^^-j 
trary their tendency appears to be to increase the violence of of Such 
changes when they do occur. The rise or fall in price which ^'^^'^ 
in the absence of any agreement results from a number of slight 
modifications, is made, under the system of agreements, at one 
bound as soon as the agreement lapses or is broken and free 
play is again given to the pent-up forces of competition. In 
spite of this disadvantage entrepreneurs seem to find even tem- 
porary stability preferable to the constant oscillations of a 
freely competitive market, and price understandings between 
competitors ranging from the familiar pools of the stock 
market to agreements among producers of materials such as 
coal and iron ore, and of agricultural products, such as fruit, 
are becoming more and more common phenomena. 



Dealings 
in 

*" Futures ' 



Dealings 
in Futures 
Illustrated 
"by 

Reference 
to Wheat 



174 Distribution ; Net or Competitive Profits 

Another expedient for minimising price fluctuations is deal- 
ing in " futures." Entrepreneurs who wish to eHminate as far 
as possible from their business the element of uncertainty con- 
tract ahead both for the materials they are to use and for the 
sale of their own products. This practice has become espec- 
ially marked in the building trades and in connection with 
different branches of iron and steel production. Building con- 
tractors, for example, before making bids on the erection of 
structures, secure options at certain prices for the delivery of 
the materials they will require. They then make their esti- 
mates with full knowledge in regard to the cost of these ma- 
terials. If their bids are accepted the only uncertainties in- 
volved in the venture attach to the accuracy of their estimates 
of the quantities of materials required and of the expense of 
labour. Similarl}^ in the iron and steel business it is customary 
for manufacturers to contract ahead for miaterials at the same 
time that they book orders for their products months in ad- 
vance. The tendency of dealings in futures is to assign to a 
particular class, namely, to those who have a special talent and 
taste for forecasting price variations, the task of estimating the 
future conditions of demand and supply in each market and 
naming in advance the prices which competition will tend to 
establish. The more accurately this class makes its calcula- 
tions, the more perfectly will its operations cause the present 
price of each good to adjust itself to the price to be established 
in the future. The best illustration of this in the United 
States is furnished by transactions on the produce exchanges. 

§ 10 1. It has become customary in all large cities for produce 
brokers to make contracts for the delivery of the great staples, 
corn, wheat, cotton, etc., three, six, and even nine months in 
advance. As this is being written (December, 1901) wheat 
is being dealt in for December, May, and July delivery. The 
United States has harvested an unusually small corn crop and 
in consequence the prices of the grains are rather more un- 
settled than is usual at this season of the year. The general 
impression is that the price of wheat will be favourably affected 
by the scarcity of corn and the question that brokers are trying 
to solve is how great a rise in price may be looked for from 
this cause. The wheat available for May delivery has already 



The Economic Function of Speculation 175 

been harvested and its amount can be estimated with a fair 
degree of accuracy. Between the end of May and the end of 
July new wheat will find its way to the market, and this is a 
factor to be reckoned with. Figuring on these data and any 
others that they can secure, wheat operators make their esti- 
mates in regard to probable price movements. They decide in 
their own minds what prices will prevail in May and July and 
buy or sell accordingly. Suppose that an influential group of 
operators accurately foresees that a much higher price must pre- 
vail in May than prevails in December. Their course will be to 
buy wheat for May delivery and ta continue to buy it as long as 
there is any margin between the price they anticipate and the 
price at which others are willing to contract to deliver it. But 
all wheat stored in elevators in December is potentially wheat 
for May delivery. It is a simple calculation to subtract the 
fee for storage and the interest on the capital invested to deter- 
mine what price such wheat should command in December to 
correspond with a given May price. As the May price rises 
the December price must, in the absence of some extraor- 
dinary condition, rise also. It follows that by forecasting 
accurately the higher price to prevail five months hence the 
operators have helped to advance the present price of wheat. 
As the price rises present consumption will be curtailed some- 
what and more wheat will be set aside for future use. This 
additional wheat will figure as part of the May supply and 
should lead the operators referred to to reduce somewhat their 
estimate of the May price. The lower price for wheat for 
future delivery will be reflected back to present or cash wheat 
and will depress its price. In this way by means of calcula- 
tions which constantly require revision operators in futures 
tend to adjust the present to the future price and to narrow the 
range of price oscillations. 

Some of the shrewdest and best-informed men in the United The 
States find it profitable to devote much of their time to study- f uncSon*^ 
ing the conditions of supply and demand with reference to each of spec-a- 
of the great staple products. They make mistakes in their cal- '''^^'^'^ 
culations of course, and very often buy or sell for future de- 
livery at prices widely dififerent from those which actually pre- 
vail when the future time arrives. But they are less apt to 



specula- 
tion vs. 
Gambling 



176 Distribution: Net or Competitive Profits 

make mistakes than men who are without their special talent 
and training, and on the whole their operations have a decidedly 
steadying influence on the prices of the commodities in which 
they deal. Even more important is the service they render in 
assuming risks in regard to price changes which otherwise all 
entrepreneurs would have to share and in making it possible 
for conservative producers to know just what prices they will 
have to pay for needed materials months before they have occa- 
sion to use them. 

Not a little criticism has been directed against dealings in 
futures on the ground that such transactions are highly specu- 
lative. This cannot be denied, but it must be remembered that it 
is not merely the dealings in futures, but the future itself, that is 
uncertain. If such dealings can be confined to the men most 
competent to make accurate predictions, their tendency will 
clearly be to lessen the uncertainties of business. The opera- 
tions of such men prepare the whole business community for 
changes that are inevitable, long before less observing people 
see any reason for them. Unfortunately the question of the 
social expediency of dealings in futures is mixed up with the 
wider question of the expediency oL stock and commodity 
speculation as it is now carried on in the financial centres of the 
country. It is notorious that this speculation is not confined to 
men who make it a business and are trained for it in the hard 
school of experience, but that it is also indulged in intermit- 
tently by a great army of men and women whose only qualifica- 
tions are a taste for gambling and the consciousness of having 
money to invest. To the extent that these uninformed specu- 
lators accept the leadership of men of sound judgment and wide 
experience, their presence simply increases the influence which 
such men can bring to bear when they deem imminent a change 
in prices. Too often, however, the mob follows after some 
false prophet and makes him more of a power for evil than he 
could be if he had only his own wealth to misdirect, or is de- 
ceived by some sagacious but unscrupulous operator who cir- 
culates false reports designed to cheapen what he wants to buy 
or to enhance in price the things he wants to sell. In either 
case its influence is altogether pernicious. How to confine 
speculation to those who have aptitude and training for it and 



Influence on Profits of Rising Prices 177 

to discourage stock and commodity gambling is one of the 
economic problems of the day. 

The general conclusion of this section is that price fluctua- Conclusion 
lions are an important source of profits and losses in the United 
States, but that the tendency seems to be towards developing a 
special class of entrepreneurs who take the risks of price 
changes and enjoy all the profits or suffer all the losses 
to which they give rise. In ordinary times losses due to price 
fluctuations are likely to offset gains traceable to this cause. 
Such fluctuations make little difference in the earnings of 
entrepreneurs considered collectively, although tliey are so 
potent in assigning profit to some and loss to others in- 
dividually. 

§ 102. In addition to oscillations in the market prices of par- The 
ticular articles, there are general price movements which ^ profit^s 
affect all business. When money prices generally are rising of Rising 
all entrepreneurs are in the happy situation of receiving more ^^^^^ 
for their goods than they expected. They have paid or agreed 
to pay for materials and factors oi production prices and rates 
adjusted to lower price conditions. Any increase in the prices 
they obtain for their products affords an extra or net profit. 
The usual effect of such a situation is to stimulate enter- 
prise. Everyone in business for himself is making money 
and all but the most conservative want to enlarge the volume 
of their businesses so that they may make more. Entre- 
preneurs eag^'ly com.pete with each other for control over the 
factors of production, and by this competition rents, wages, and 
interest are advanced until prosperity appears to be general. 
To illustrate, suppose the different branches of production are 
represented by the letters A, B, C, D, etc. In all these indus- 
tries profits above the vv^ages of management are being 
received. Entrepreneurs in industry A are encouraged to 
enlarge the producing capacities of their plants and to enter the 
market as hirers of labour and borrowers of capital. But the 
number of workmen and the supply of capital goods are not to 
be increased at will. To employ more labour and capital at A 
means normally to draw them away from B, C, and D, and this 
can be done only by offering higher wages and higher rates of 
interest. But at B, C, and D, there are siroilar inducements to 



178 Distribution: Net or Competitive Profits 

enlarge production. Rather than lose workmen or capital 
goods, entrepreneurs in these industries will offer still higher 
wages and interest. This competition will continue as long as 
there is any extra profit in any line of competitive business to 
induce it. Unless prices continue to advance to ever higher 
levels the rising expenses of production will presently cut 
down the margin of profit until it again amounts only to the 
wages of management to which entrepreneurs are entitled. 
Such bursts of prosperity, if unaccompanied by an actual in- 
crease in the net product of goods, benefit entrepreneurs at the 
expense of the other sharers in distribution, whose money in- 
comes increase less promptly than the prices of the goods they 
consume. As a rule, however, one effect of rising prices is to 
furnish more active employment for all of the factors in pro- 
duction and to cause a correspondingly enlarged output of 
goods. In time this increased volume of goods v/ill be avail- 
able for consumption and then the prosperity begins to have a 
solid basis in the increased well-being of all classes in the 
community. 
Of Falling A period of falling prices affects industrial relations in an 
exactly opposite way. Instead of receiving profits in excess of 
their wages of management, entrepreneurs now experience 
losses. To reduce these as far as possible, they tend to reduce 
the volume of goods which they produce and to curtail the ex- 
penses of production. Either by discharging workmen and 
failing to renew capital as capital goods are worn out, or by 
cutting down rents, wages, and interest rates, entrepreneurs 
compel other classes to share their losses with them. Unless 
the fall in prices continues, it will not be long before the ex- 
penses of production are scaled down by these measures to a 
point which again permits entrepreneurs to enjoy wages 
of management commensurate with their abilities. In this 
case the depression, in the sense of diminished well-being, will 
be merely apparent until it causes an actual curtailment of 
the net product. During the short interval that business is 
continued on the same scale in the hope that the drop in prices 
will prove to be only temporary, what entrepreneurs lose will 
be gained by other sharers in distribution, whose money in- 
comes now mean larger command over consumable goods. 



Influence of Discoveries and Inventions 179 

In the United States, even more than in other countries, Alterna- 
great importance must be ascribed to alternating periods of between 
prosperity and depression as sources of profit and loss. To Prosperity- 
refer only to recent years, from 1893 until the summer of 1897 Depression 
conditions were such that the majority of entrepreneurs found i^ ^}^^ 
it barely worth while to continue in business, while a great states 
many were unable to do so. During the four years, 1893 ^^ 
1896, the number of failures in the United States aggregated 
57,412, with total liabilities amounting to $919,065,629. Since 
the summer of 1897, on the other hand, business has been in a 
flourishing condition and there is every indication that the 
profits of entrepreneurs have been large. During the four 
years, 1898 to 1901, the number of business failures was only 
43,299, and v/hat is even more significant, the total liabilities 
were only $473,130,837, or little more than half those for the 
previous years. Of course in each period there were some 
entrepreneurs who for special reasons were making profits 
while others were losing, but the general experience was as de- 
scribed. The cause of these alternating periods of prosperity 
and depression cannot be understood until we have considered 
the subjects of Money and Credit in Chapters XVII. and 
XVIII. 

§ 103. Entrepreneurs who discover, invent, or make avail- 'The 
able new and more economical means of want satisfaction are of 
among the greatest benefactors of the race. It is through their Discoveries 
efforts that the consumption of a people gradually adjusts itself inventions 
to the productive capacities of the environment. Examples of *^^ Profits 
such innovations are legion. Of late years in the United 
States bananas have been introduced on a large scale as a cheap 
and wholesome supplement to the cereal foods of the temperate 
zone. At the same time, dozens of varieties of cereal foods 
have been invented, which preserve the nutritious elements in 
the grains more fully than the white wheat flour v»?hich they 
serve in a measure to supplant. In the domain of transporta- 
tion, bicycles and trolley cars have already largely superseded 
horses, and they in turn are beginning to be superseded by 
automobiles. Other recent inventions of far-reaching impor- 
tance are the telephone, the linotype, and the typewriter. In 
connection with each of these innovations and thousands of 



i8o Distribution : Net or Competitive Profits 

others introduced during the last thirtj^ years, large profits 
have been made either by the inventors themselves or by entre- 
preneurs who have made the inventions commercially success- 
'ful. Often these new goods or the methods of producing them 
have been patented and the profits arising from them have been 
in the nature of monopoly profits. In other cases they have 
been kept secret for a time. Even when they have been from 
the first open to competitive production, however, it has taken 
time for the supply to become so adjusted to the demand that 
the price has left no margin for extra profit for the enterpris- 
ing pioneers. 
Increased In estimating the extent of the profits enjoyed by entrepre- 

Some En- neurs as a whole in consequence of the introduction of novel- 
trepreneurs ties, two substantial deductions must be made. In the first 
Diminished place few if any new goods are offered for sale which do not 
^J?^*h attract purchasers from other goods. Even novelties which 

do not directly supersede other goods previously used for the 
same purpose, cause substitutions which are detrimental to the 
interests of other entrepreneurs. Thus the introduction of the 
bicycle is said to have interfered with the business of watch 
manufacturers in the United States. In a similar way the 
introduction of the trolley car led to the shutting down of more 
than one horseshoe-nail factory. From the large profits of 
entrepreneurs who produce and sell successful novelties, must 
be deducted the losses of entrepreneurs whose businesses suffer 
because novelties are put on the market. The second deduc- 
tion is for losses incurred by inventors and entrepreneurs who 
try to make a success of novelties which are not appreciated 
by the consuming public. Millions of dollars are spent every 
year in the promotion of discoveries and inventions which are 
complete failures from the business standpoint. In a country 
like the United States, where entrepreneurs are willing to 
assume large risks in the hope of large gains, it is not at all 
unlikely that more is lost each year in the effort to find a market 
for unsuccessful novelties than is made in connection with 
those which succeed. The net profit to entrepreneurs collec- 
tively from the production of novelties is, for this reason, 
smaller than most people imagine. 

§ 104. Quite as conspicuous in a progressive country as 



Process by which Profits are Eliminated i8i 

profits from novelties are profits from improved methods The 

of production. Every entrepreneur is constantly on the of Improve^ 

alert to improve his methods of production and in this way meats in 

, ,. „ ., . , , . Methods of 

to reduce his expenses. Consider, tor example, the situa- Production 

tion of farmers. The prices they are to get for their products ^^ Profits 
and the rents, wages, and interest rates they must pay are 
deteimined by general market conditions. If they are to 
make more than mere wages of management they must im- 
prove on current methods of cultivation. By treating 
the land in a different way, using new fertilisers, organising 
their labour force better, or buying superior kinds of agri- 
cultural machinery with their capital, they may accomplish this 
result. As their expenses of production are reduced, a larger 
or smaller margin is left as an extra profit or reward for their 
enterprise. But such improvements soon become matters of 
common knowledge and common practice. Other farmers 
imitate them, and in time they become the methods of repre- 
sentative farmers generally, whose expenses have a determin- 
ing influence on prices. The extra profit which was for a 
while enjoyed disappears either because prices are lowered or 
because wages, interest, etc., are raised, or because both changes 
co-operate in adjusting prices again to the expenses of produc- 
tion. Sometimes the new methods of production are kept 
secret so that they do not become general ; at other times they 
are protected by patent. Either event gives rise to a temporary 
monopoly and to a special monopoly profit which may be en- 
joyed as long as the monopoly continueSo 

To manufacturers the importance of new methods is even The 
greater than to farmers. Producing usually on a larger scale "^'^^^s "y 
and employing more capital of diverse and complex forms Profits are 
manufacturers fi.nd fullest scope for any originality or enter- Ruminated 
prise which they may possess. Improvements in the tools and 
machines used, in the form of division of labour employed, and 
in the efficiency with which natural power, labourers, and capi- 
tal goods are co-ordinated and made to work together towards 
the common end, are introduced in succession. Each improve- 
ment curtails the expenses of production and insures to the 
entrepreneur adopting it a temporary profit. If he can keep 
the new process secret or have it patented, he may enjoy a 



Change 
a Cause 
©f Profits 



Profits 
and Losses 
the Normal 
Conse- 
quences 
«f Progress 



The 

Inflaence 
«f the 
Variable- 
ness of 
Climate 
on Profits 



182 Distribution : Net or Competitive Profits 

monopoly profit for some years; otherwise it soon becomes a 
matter of common knowledge and is adopted by one com- 
petitor after another until the old process is rendered obsolete. 
In time expenses of production and prices are again brought 
to a parity and the extra profit is eliminated. 

As the above analysis suggests, profits which are not 
monopoly profits are soon overtaken and eliminated by com- 
petition. If improvements were to cease profits from this 
source would soon cease also. In progressive communities 
they continue to be an important element in the wealth an- 
nually divided among the sharers in distribution because im.~ 
provements follow each other so swiftly that for every extra 
profit that is cut off by competition other extra profits due to 
more recent innovations are substituted. 

The same process which cuts down extra profits as the new 
methods upon which they depend are more and more generally 
used, inflicts loss on entrepreneurs who have not the intelli- 
gence or enterprise to adopt them. Their expenses of produc- 
tion remain stationary or even increase, and in consequence 
they incur losses as the competition of progressive entrepreneurs 
forces prices down to the new cost level. From this it follows 
that the extra profits of the progressive are usually offset before 
they disappear by losses on the part of the plodding and un- 
progressive. It is for this reason that business failures are 
more common in the most progressive and on the whole pros- 
perous countries than in those where old methods are adhered 
to and innovations are frowned upon. In the former competi- 
tion is more strenuous and the relatively unfit are more 
promptly eliminated. 

§ 105. All industries which depend upon climate, rainfall, 
the direction and velocity of the winds, or other variable mani- 
festations of nature show irregular returns from year to year, 
and these irregularities count as profits or losses to entrepre- 
neurs. The variable profits of the farmer from this cause are 
familiar to everyone. He invests capital in the cultivation of 
his land, paying rent, wages, and interest at rates determined 
by general market conditions. In making his calculations he 
assumes that he will realise at least an average crop. If it 
prove to be a good year the crop will be larger than the average 



Profits and Losses Balance 183 

and fie will receive for it enough to cover the expenses of pro- 
duction and to leave a comfortable margin for profit. In a 
poor year, on the contrary, he may not only make less than 
his proper wages of management, but even lose some of his 
■capital. Similarly dependent upon nature are cattle raisers, 
hunters, fishermen, navigators, and many others. In the case 
of each the variability of nature appears as a perennial cause 
tif profits and losses. 

There is every indication that progress in the technique of Progress 
production is gradually lessening man's dependence upon Man's ^'^^^'^ 
nature's moods even in the extractive industries. In farming Depend- 
increased ability to foresee weather changes, artificial irrigation, Nature 
and a host of other improvements enable the cultivator to sur- 
mount natural difficulties which would at one time have been 
fatal to success. In water navigation even greater advances 
have been made, since steam vessels are now well-nigh indif- 
ferent to all but the severest storms. This progress will doubt- 
less continue, but for many generations the industries which 
at some points depend upon variable nature will show profits 
or losses as natural conditions are favourable or the reverse. 

In connection with the variability of natural conditions a Insurance 

special kind of business has grown up, that of insurance. Ex- ^^ Escap-^ 

perience has taught that even the most unusual occurrences, ing Conse- 

such as the number of suicides in a given month, follow each changing- 

other with considerable uniformiity year after year if a large Natural 

..,..,,. . , , A . , ■, • 1 Conditions 

group of mdividuals is considered. Any accident to which a 

large number of persons is liable, and which can be confi- 
dently predicted as likely to befall a certain proportion each 
year, offers a field for insurance. If all of the persons ex- 
posed to the accident can be induced to contribute pro rata to 
an insurance company, sufficient sums to make good the loss 
to those who actually experience it may be accumulated. By 
means of insurance losses which formerly fell with crushing 
force upon individual entrepreneurs may now be changed to 
one of the items in the normal expense of production for all. 

If a general view of profits and losses due to the variable- Profits 
ness of nature be taken, it appears probable that over a series Tend to 
of years they will about balance each other. A period of Balance 
favourable conditions is likely to be followed by a period when 



Profits 
and Rent 



Profits 
in a New 
Countrj' 
Usually 
in Excess 
of Losses 



Practical 
Problem 
Connected 
with 

Profits Due 
to Exploita- 
tion of 
Virgin 
Natural 
Resources 



184 Distributioo : Net or Competitive Profits 

nature seems adverse. Moreover, profits in any given in- 
dustry soon invite expansion and cause their own extinction, 
unless it is clearly perceived that they no more than make up 
for losses in the same industry in other years. From this cause 
should the balance turn for any considerable period towards 
the profits side, forces would be set in operation tending to 
restore the equilibrium and to make profits and losses in each 
industry offset each other. 

§ 106. In a comparatively new country like the United 
States an important source of profit is the exploitation of vir- 
gin land and new mineral and other natural resources. As 
these resources are opened up and their value is demonstrated 
the incomes to which they give rise become subject more and 
more to the principles determining rent. During the early 
stages of exploitation, however, they are too irregular and un- 
certain to be classified as anything else than profits to the 
enterprising entrepreneurs who devote time and means to their 
development. 

Profits from this source in a progressive country are sure 
to exceed largely losses due to misdirected investments. At 
the same time it is a debatable question whether in some highly 
speculative ventures concerned with the exploitation of new 
resources, such as gold mining, more wealth has not been 
wasted in the fruitless attempt to develop paying mines where 
nature has created none, than has been returned in profits and 
rents to the fortunate entrepreneurs who have made rich 
strikes. There is a fascination about searching for mineral 
wealth, and especially for gold, that attracts men and capital 
out of proportion to the likelihood of success in such enter- 
prises, and though it may not be true as often alleged that every 
pound of gold in existence has cost on the average more than 
it is worth, this certainly approximates the truth. 

The large element of chance that figures in the determina- 
tion of profits from the development of new regions, makes 
economic desert of less moment here than in connection with 
other species of profit. This is particularly true in connection 
with the mining industry, which presents numerous examples 
of able men toiling through their whole lives for a scanty and 
precarious subsistence, while others, having neither ability nor 



The Effect of Changes in Wages 1 85 

training, acquire great wealth. There can be no question that 
it would be to the advantage of industrial society, if the re- 
turns to entrepreneurs in these industries could be equalised 
without lessening the motives which encourage their activity 
and enterprise. Society could hardly undertake to share the 
losses of those who make unwise investments, as this would 
put a premium on folly, but it has been argued that society 
may properly share the profits of those whose ventures are 
successful. Just how this might be done has not yet been 
clearly explained by advocates of the policy. 

S 107. In the foregoing analysis it has been assumed that The 
, t - . . ^1 ^ J. A Influence 

the rents, wages, and mterest rates that entrepreneurs must ^f changes 

pay are fixed by general market conditions and may not be ^^^® 
changed by individual entrepreneurs. This is true in so far shares 
as general market conditions remain stable, but when these are o^ Prefits 
changing, as they usually are in developing countries, when 
new lands are being brought under cultivation, when the popu- 
lation is growing, and when capital is increasing, then rents, 
wages, and interest rates must change too, and there is oppor- 
tunity for enterprising entrepreneurs to hasten or resist gen- 
eral tendencies and in this way to secure for a time profits 
above the wages of management. A few examples will indi- 
cate hovi;- profits may arise from these sources. 

One change that has been going on in the United States for The 
several generations is the lowering of agricultural rents in the p^nf^g 
Eastern States as new lands have been developed in the West. Rents 
Aggressive farmers of rented farms have taken the initiative in 
demanding better terms as economic conditions have made a 
fall in rents inevitable. By so doing they have avoided the 
losses that their less progressive neighbours sustain by con- 
senting to renew their leases on the same terms as before. In 
other sections where rents are rising the more aggressive 
tenant farmers refuse to pay more until actually compelled to, 
and in this way keep their expenses below those of their more 
tractable neighbours. 

Similarly there have been general movements in the wages The 
that competition secures to different grades of labour. When changes 
wage rates are rising, it is usually possible for some entrepre- in Wages 
neurs to resist the movement for a time and in this way to 



Sammary 



Conclusion 



i86 Distribution: Net or Competitive Profits 

keep down their expenses, without losing any considerable 
number of their employees. Eventually they must accept the 
higher rates or lose their men, but during the interval that 
they refuse to do so, they may reap an extra profit. On the 
other hand, aggressive entrepreneurs lead the movement to re- 
duce wages when rates are tending downwards and may in this 
way cut down their expenses sooner than their competitors, who 
receive no higher prices than they do for their products. In 
agreements as to rates of interest there is less chance for over- 
reaching because those who lend and those who borrow are 
about equally conversant with the conditions. At the same 
time even here some entrepreneurs gain an advantage when 
rates are changing by making better terms than their com- 
petitors. 

In all of these cases prompt adaptation to favourable condi- 
tions or grudging acceptance of unfavourable changes only at 
the eleventh hour, give rise to profits. Failure to cut down 
expenses as occasion offers or too ready acquiescence in rising 
expenses may, on the other hand, cause losses. Taken as a 
whole profit and loss accounts under these heads are likely to 
about offset each other for entrepreneurs collectively. 

§ 1 08. To sum up what has been said in reference to the 
different sources of profits, it has been shown that their pres- 
ence as important shares in distribution is due to the fact that 
changes are constantly occurring and that it takes time for 
competition to adjust economic relations to changed conditions. 
The more important changes from which profits or losses arise 
have been described as price fluctuations, which may affect 
only particular commodities or the prices of things generally, 
the introduction of nev; goods, improvements in the methods 
of producing old goods, variations in climatic and other natural 
conditions, the opening up of new lands and natural resources, 
and modifications in the rates of remuneration that must be 
paid to the factors of production, or to those who control them. 

If industrial society is progressing and if in each period 
there is more wealth to be divided among the sharers in dis- 
tribution than in the preceding period, a large part of the in- 
crease will appear temporarily as extra profits going to entre- 
preneurs, lo the same way, when industrial society is retro- 



Conclusion 187 

gressing the loss falls first upon entrepreneurs. Theirs is the 
elastic share that increases or diminishes readily in response to 
changed conditions. But whether the net balance happens to 
be above or below the wages of management, competition 
among entrepreneurs themselves is a force which tends con- 
stantly to make their gains correspond to bare wages. Profits 
stimulate them to bid against each other for the factors of pro- 
duction and to raise rents, wages, and interest rates until ex- 
penses and prices are again equal. Losses lead them to con- 
tract production and cut down expenses until in this way- 
equality is restored. Thus, however large profits or losses 
may be at any given time, they are always in process of extinc- 
tion, always, that is, unless monopoly influences intervene and 
prevent the forces of competition from accomplishing their 
work of elimination. 

REFERENCES FOR COLLATERAL READING 

^Marshall, Vv'inci^les oi Economics, Book VI., Chaps. L, 11., VII., 
and VIII.; * Walker, Political Economy, Part IV., Chaps. I. and 
IV.; '^Pzersojt, Principles of Economics, Vol. I., Part I., Chap. V.; 
* Fetter, Principles of Economics, Chap. 31; *Carver, The Distri- 
bution of Wealth, Chap. VII. 



CHAPTER XI 



DISTRIBUTION: MONOPOLY PROFITS 



The 

Nature of 
Monopoly 



Distinction 
between 
Monopoly 
and Dif- 
ferential 
Advantage 



§ 109. Monopoly means usually in economics such control 
over the supply of an economic good as enables the monopolist 
to regulate its price. This regulation is of course never abso- 
lute. It must always have regard to the conditions of produc- 
tion and the extent and elasticity of consumers' demand. 
Within certain limits, however, if there is a real monopoly, 
control is effective and may give rise to monopoly profits. 

A distinction which it is important to note at the outset is 
that between monopoly and differential advantage. In nearly 
every branch of competitive business differential advantages 
are found. In farming one producer of wheat uses better 
land than another producer. In manufacturing one mill owner 
utilises a superior source of water power. In all pursuits 
competitors are themselves differently endowed, some being 
more capable than others and receiving larger returns, al- 
though all sell the same goods in the same markets at the 
same prices. Although important sources of income such dif- 
ferential advantages are not the cause of monopoly profits. 
The fact that some pieces of land and some sources of power 
are better than others, does not prevent an active compe- 
tition between farmers and manufacturers which serves to 
keep prices down to the expenses of production of repre- 
sentative firms. Equally ineffectual as a bar to active com- 
petition are the personal differences between men. The con- 
sideration of the influence of these differential advantages upon 
the distribution of incomes, belongs under the head, not of 
monopoly, but of rent and wages. Only when competition is 
suspended and one firm or a combination of firms secures such 
control over the supply that it may regulate the price, does 
monopoly appear. Its essence is control over the supply and 
its surest indication is regulation of prices. 

188 



The Kinds of Monopoly 189 

The above definition of monopoly refers to producers' or Buyers' 
sellers' monopolies, the species that is most familiar to the busi- Monopolies 
ness world. Contrasted with it are buyers' monopolies, which 
rest upon control over demand and regulation of prices from 
that side. In practice buyers' monopolies have been so 
unusual that they merit no extended consideration in this 
chapter. 

§ no. The following are the principal classes of monopolies Ihe 
which are of interest to the economist: (i) personal mo- j^f^^^iopolv 
nopolies; (2) legal monopolies, which may be, (a) public or 
(b) private; (3) natural monopolies of situation; (4) natural 
monopolies of organisation; (5) capitalistic monopolies; (6) 
labour monopolies. 

A personal monopoly arises when one individual controls the The Im- 
supply of a given good either because he possesses unique £)l!fferent° 
talent (e. g., an artist's monopoly of his own works), or be- Kinds of 
cause he uses a secret process so superior to all other processes i^j^the^"" ^ 
that he is able to drive all competitors from the field. A legal United 
monopoly is one based upon some law or governmental regu- 
lation. Examples of public legal monopolies are furnished by 
the tobacco monopoly of France, the salt monopoly of Saxony, 
and the post-office monopoly of the United States. The most 
familiar private legal monopolies are those based on patents, 
copyrights, and exclusive franchises. Natural monopolies of 
situation are of two kinds : those due to social and those due 
to physicial conditions. Of the first kind are the monopolies 
which the single village blacksmith and storekeeper enjoy 
until competitors enter the field. More important are mo- 
nopolies of the second kind, which depend upon some physical 
limitation in the sources of supply of the goods controlled. Of 
this type are businesses using unique mineral springs or moun- 
tain passes, or controlling the whole areas from which certain 
commodities, such as diamonds in Africa or anthracite coal in 
the United States, are obtained. Natural monopolies of organi- 
sation are businesses which obey a law of diminishing expense^ 
no matter how large the business becomes. Such are the- 
railway and businesses concerned with the distribution of 
letters, telegrams, parcels, gas, water and electrical power. 
Capitalistic monopolies are those which result from the un- 



Mouopoly 
Tjs, Com- 
petitive 
indtistry 



190 Distribution : Monopoly Profits 

hampered power of large aggregations of capital and are 
represented in the United States by the so-called trusts. 
Labour monopolies are monopolies resulting from combina- 
tions of skilled workmen able to control the supply of the 
economic good, labour. 

When all of the businesses in a country like the United 
States which may properly be classed under one or other of the 
above heads are considered, the importance of monopoly is 
more likely to be exaggerated than underrated. Personal mo- 
nopolies are encountered in connection with all artistic and pro- 
fessional work. Although not usually the ground for very 
large incomes in individual cases, they exert in the aggregate 
a considerable influence on the distribution of wealth. Secret 
processes are not at present the source of very great monopoly 
returns for the simple reason that those who control such 
processes usually prefer to have their monopolies confirmed by 
patent. The number of patented processes now used in con- 
nection with business enterprises may be inferred from the 
fact that from 1837 to 1900 the United States issued as many 
as 675,561 patents. Although the monopolies to which patents 
give rise are only temporary, in a country in which processes 
are so soon superseded as the}^ are in the United States, they 
serve to give a monopolistic character to nearly every branch 
of manufacturing business. Businesses enjoying exclusive 
franchises are less common, but on the other hand they in- 
clude some of the branches of production that are most vital to 
the general well-being such as water, gas, and street railway 
companies. Natural monopolies of situation are not as yet very 
important, but they appear to be on the increase. A fev/ years 
ago the suggestion that a single corporation could monopolise 
the iron-ore and coking-coal resources of the United States 
would have been greeted with incredulity. Such a consumma- 
tion has not yet been realised by the Steel Trust, but its prog- 
ress in that direction must make economists hesitate to im^pose 
any limits upon the possible development of natural monopolies 
of this type. The importance of natural monopolies of organi- 
sation, which embrace the chief transportation businesses of the 
country, can hardly be exaggerated. Upon them all other 
businesses are vitally dependent, and this dependence increases 



The Power of Substitution 191 

rather than decreases as production becomes more concentrated 
and the division of labour is made more minute. Finally, the 
capitalistic monopolies, and the labour monopolies, which are 
among the latest fruits of the country's industrial development, 
merit all of the attention that has been accorded to them. If 
these various monopolies were quite unhampered in their con- 
trol over the prices of the goods they produce the present 
might well be styled the age of monopoly rather than the age 
of competition. But such control is subject to very important 
limitations, v^/ith the result that monopoly is more of a form 
than a reality for the greater number of the businesses that 
have been enumerated. 

§ III. The most important limitations on the power of a Limita- 
monopoHst to regulate prices are three : ( i ) the possibility j.|.g Power 
open to buyers of substituting other goods for those which of 
are monopolised, (2) the possibility of competition which may ^ ^ 
deprive the monopoly of its control of the supply, (3) the pos- 
sibility of legal interference. Taken together these three limi- 
tations confine the price-making power of monopolies within 
rather narrow limits and explain the fact that the practical 
operation of monopolies is so much less harmful to the 
interests of consumers than contemplation of the nature of 
monopoly would lead one to expect. 

The limitation imposed by the power of substitution depends The Powe? 
upon the range of sub?titute goods open to buyers. A few °tittitioia 
examples will make this clear. Suppose that the monopolised 
good is a particular kind of wine. Substitutes for it are all 
other kinds of wine, all other kinds of liquors, even all other 
kinds of comxforts and luxuries so far as wine itself is in this 
category. An attempt to increase the price would under such 
circumstances greatly reduce the amount of wine of the par- 
ticular brand that could be sold. Unless it had especially en- 
deared itself to the palates of consumers, a comparatively small 
increase in its price would spoil its market. The attempt to 
double the price might even divert the entire demand to other 
goods. In such a case the effort to win more than a small mar- 
gin of monopoly profit from consumers would be fatal to the 
interests of the monopolist. 

Again, suppose refined sugar to be the monopolised product. 



Sugar an 
Example 



Substitu- 
tion in 
Connection 
with a 
Railroad 



Potential 

Competi- 
tion as a 
Check on 
Monopoly 



192 Distribution: Monopoly Profits 

>, The customary price for this good is so low as to encourage its 
general consumption, and it is now looked upon by nearly every- 
one as a necessary of life. Moreover, substitutes for it, such 
as raw sugar, molasses, maple syrup, etc., are few and unsatis- 
factory. The range for substitution is so narrow in this case 
that the monopolist may make considerable changes in the price 
without seriously affecting the demand. In fact, if the price is 
raised the demand for other articles is more likely to be cur- 
tailed than the demand for sugar itself. Under such cir- 
cumstances the conditions as regards the possibility of substi- 
tution are peculiarly favourable to monopoly profit. Fortu- 
nately for consumers they are less favourable, as is indicated 
below, as regards the possibility of competition. 

Take, finally, the case of a railway which furnishes the only 
available outlet to the market for a given district. Its rate- 
making is not controlled by competition in the ordinary sense, 
but its patrons have always the alternative of not prosecuting 
the industries whose products must be shipped to the distant 
market. Their power of substitution is that between produc- 
ing for rail shipment and devoting their land, labour, and capi- 
tal to other production. In practice this is a very important 
limitation, since the economical administration of a railway 
demands a large volume of traffic, and a road cannot afford to 
make its rates so high that only a few trains will be run over 
its costly roadbed each day. At the same time in many locali- 
ties this limitation is not sufficient to insure reasonable rates, 
and legal interference has been found necessary to protect the 
interests of the public. 

The possibility of exciting competition and losing control of 
the supply is an ever-present danger to capitalistic monopolies 
and in less degree to personal and natural monopolies of 
organisation. This has been illustrated over and over again 
in connection with trusts in the United States. An example is 
furnished by the history of the sugar trust. " In 1887 the 
Trust was formed. The margin of profit was immediately 
raised more than half a cent a pound, at times even fully one 
cent a pound. . . The margin fell again in the latter part of 
)i889. This was owing to the fact that large competing re- 
fin-eries, especially those built by Claus Spreckels at Phila- 



Competition in Connection with Railroads 193 

-delphia, had entered the field. For rather more than two years, 
while this vigorous competition continued, the margin fell back 
to a point substantially as low as had existed before the forma- 
tion of the Trust. In February, 1892, the Trust bought up the 
competing refineries and the margin was at once put back to 
the non-competitive height. From the years 1892 to 1898 the 
margin remained, relatively speaking, high. . . In the latter 
part of 1898 vigorous competition against the American 
Sugar Refining Company (the reorganised Trust) began on 
the part of Arbuckle Brothers, Claus Doscher, and others." * 
Similar examples might be cited from the histories of combi- 
nations in other industries showing that competition is an ever- 
present possibility that has to be reckoned with by the man- 
agers of capitalistic monopolies. 

That the possibility of competition is a limitation on the The 
monopoly of the village blacksmith, the village grocer, etc., is t^fe sfng-le 
too obvious to require discussion. So long as these business Village 
men keep their charges down to fair wages of management 
for themselves their monopoly of these businesses may be undis- 
turbed. Let them increase their charges, however, or let the 
village grow until there is employment enough for two in 
these lines, and a competitor is sure to appear. This does not 
mean that such men may not enjoy monopoly profits from 
their situation, but that they must be cautious in increasing 
their charges at the risk of losing their monopolies. 

Natural monopolies based on the law of diminishing expense Competi- 
are subject to the same check. For example, in the railway connectioa 
business, while it is true as a general statement that one com- with 
pany can carry freight and passengers between two points 
more cheaply than could two companies dividing the traffic be- 
tween them, it is also true that the difference is not so great 
that unduly high rates charged by the first company will not 
induce capitalists to construct a parallel road to compete for 
the business. Such competition is almost always uneconomical 
from the social point of view, but the history of railroad build- 
ing in the United States is full of evidence to show that it 
frequently springs up and acts as a limitation on monopoly. 

♦ Jenks, The Trust Preblem, pp. 136-138. 



The t^ear 
of Govern- 
mental In- 
terference 
a Check on 
Monopoly 



Conclusion 
in 

Reference 
to Efficacy 
of Checks 



The 
'L;aw of 
Monopoly 
Pi'ice 



A Patented 
Brand of 
Soap as an 
Example 



194 Distribution : Monopoly Profits 

The last limitation referred to, that is, the possibility ot gov- 
ernment interference, applies especially to natural and capital- 
istic monopolies. In the case of the former it is coming- to be 
recognised more and more fully that competition cannot be 
relied upon to regulate the businesses affected and that govern- 
ment interference or government regulation is the only alterna- 
tive. Hov^ far this conviction has found expression in law is 
considered in Chapter XXIV., in connection with the discus- 
sion of efforts to regulate railways in the United States. Gov- 
ernment interference with capitalistic monopolies or trusts has 
been attempted also in the United States through the so-called 
anti-trust acts considered in Chapter XXV. 

Summing up these considerations in reference to limitations 
on monopoly, we may conclude that the possibility that other 
goods may be substituted for the monopolised product applies 
to all monopolies, but with a force varying in each case with 
the range of substitutions open to consumers. The possibility 
of competition threatens all except personal monopolies of 
ability, legal monopolies, and natural monopolies of location. 
LvCgal interference, finally, has actually been applied to natural 
and capitalistic monopolies. These three limitations serve as 
effectual checks on the reckless exercise of monopoly power. 
Only when the range of substitutions open to consumers is nar- 
row and the obstacles which competitors must overcome, in 
order to enter the field, formidable, does monopoly present a 
serious problem or is legal interference necessary. 

§ 112. Monopolists, so far as they are free to obey the dic- 
tates of self-interest, tend to fix those prices for their products 
which will yield the largest monopoly profits. The various 
circumstances which determine what these prices are may be 
made to appear from a few typical examples. 

As the simplest case let us take a patented article in general 
use such as a special brand of soap and assume that the ex- 
pense of producing and selling such soap is five cents a cake 
irrespective of the amount sold. According to the familiar 
law of demand the price that may be obtained will fall as the 
quantity offered for sale is increased. In the case of a com- 
modity like a special brand of soap this law is reinforced by the 
large range of substitutions open to consumers, and in conse- 



Another Case 195 

quence the demand responds readily to changes in price. Sup- 
pose that the volume of sales at different prices, the gross re- 
ceipts, and the monopoly profits over and above the expenses of 
production stand as follows : 

No. of 

Gross Receipts 

$ 50,000 

52,000 

60,000 

100,000 

120,000 

150,000 

250,000 

270,000 

280,000 

280,000 

360,000 

Under these circumstances it is evident that lowering the price 
tends to increase the monopoly profits by successive additions 
until the price is brought to ten cents, but that further reduc- 
tions below ten cents reduce the monopoly profits. Ten cents 
is thus the price which self-interest will lead the monopolist to 
establish. 

In the above case it has been arbitrarily assumed that the Another 
expense of production is constant for each unit of product no 
matter how many units are produced. A more probable con- 
dition for a com.modity like soap is for the expense to decrease 
as the volume of production is increased, at least until a rather 
large output is realised. The following table conforms to this 
assumption : 



Price 


Cakes Sole 


500 


100,000 


40 


130,000 


30 


200,000 


25 


400,000 


20 


600,000 


15 


1,000,000 


10 


2,500,000 


9 


3,000,000 


8 


3,500,000 


7 


4,000,000 


6 


6,000,000 



Expenses 


Profits 


5,000 


$ 45,000 


6,500 


45,500 


10,000 


50,000 


20,000 


80,000 


30,000 


90,000 


50,000 


100,000 


125,000 


125,000 


350,000 


120,000 


i75>ooo 


105,000 


200,000 


80,000 


300,000 


60,000 



Case 





No. of 


Gross 


Expense 


Gross 




Price 


Cakes Sold 


Receipts 


per Cake 


Expenses 


Profits 


500 


100,000 


$ 50,000 


120 


f 12,000 


$ 38,000 


40 


130,000 


52,000 


11 


14,300 


37.700 


30 


200,000 


60,000 


10 


20,000 


40,000 


25 


400,000 


100,000 


8 


32,000 


68,000 


20 


600,000 


120,000 


7 


42,000 


78,000 


15 


1,000,000 


150,000 


6 


60,000 


go, 00a 


10 


2,500,000 


250,000 


5 


125,000 


125,00(7 


9 


3,000,000 


270,000 


4f 


145,000 


125,00(7 


8 


3,500,000 


280,000 


44 


165,000 


115,000 


7 


4,000,000 


280,000 


4f 


185,000 


95,o(X) 


6 


6,000,000 


360,000 


4i 


270,000 


go, 000 



.L/aw of 

Monopoly 

Price 

Indicates 

the Limit 

ct Price 

rather 

than the 

Actual 

Price 



Complica- 
tions in 
Connection 

v/ith 
Monopolv 

Prices 



196 Distribution: Monopoly Profits 

Upon the conditions assumed in this example, the mo- 
nopoly profit shows a tendency to increase as the price is low- 
ered until ten cents is reached. The profit at nine cents is 
exactly the same amount as the profit at ten cents. Below nine 
cents the profit begins to fall off, so a further lowering of the 
price is to be avoided. In this case, accordingly, the monopoly 
price lies between nine and ten cents. 

If the monopolist enjoys exclusive control of the monopo- 
lised good, he may fix the price at the point affording the 
maximum profit without fear of exciting competition'. But 
few monopolists are so fortunately situated as this implies. 
Competition, even though not in active operation, is an ever- 
present possibility with which most monopolists must reckon. 
Prudence dictates usually a more conservative policy in refer- 
ence to prices than that which would secure for the time being 
the largest monopoly profits. In the assumed cases the price 
of soap is likely to be fixed at something less than ten cents, in 
the expectation that the present loss in profits will be more than 
made good by the protection of the monopoly from future 
competition that it insures. In the same way fear of govern- 
mental regulation often checks the rapacity of monopolists long 
before such regulation is actually undertaken. The law of 
monopoly price thus indicates the extreme limit to which 
monopolists are likely to go in fixing prices and not neces- 
sarily the price that they will actually charge under the prac- 
tical limitations which control their conduct. 

§ 113. In the case of many monopolised products, as has 
been pointed out by Professor Ely,* there are different strata 
of demand each controlled by somewhat different considera- 
tions. This also may be illustrated by reference to the demand 
for such a commodity as soap. Many consumers would pre- 
fer to pay fifty cents a cake for soap if they believed that by 
so doing they were getting a better article than their neigh- 
bours. Taking advantage of this fact, the shrewd monopolist 
of a particular brand of soap offers several different grades 
for sale at different prices. That intended for the mass of 
consumers is put out under the firm name simply, at the price 
— ten cents, say — calculated to afford the maximum monopoly 
* Mo7iopoHes and Trusts, Chapter III. 



The Law of Monopoly Price 197 

return. Along with this is offered at a higher price — say, 
twenty-five cents — the same article, coloured a Httle differently 
or pressed into a different shape, which is designated, 
" superior." A dash of inexpensive scent and a more elaborate 
wrapper transforms " superior " soap into " superfine " and in- 
sures a limited sale at fifty cents a cake. In this way not only 
is a larger margin of profit secured on the supposedly better 
grades, but consumers are reached who vv^ould never think of 
baying plain, ordinary soap for the very reasons that recom- 
mend it to less fastidious people. 

The practice of offering substantially the same goods at dif- Practice 
ferent prices is by no means confined to manufacturers of ?^-^^, "I* 
patented toilet articles. It is found in connection with nearl)^ Prices for 
every kind of commodity that figures in personal consumption. Goods Not 
Makers of bicycles and automobiles, manufacturers of patented Unusual 
foods and beverages, fashionable tailors and haberdashers, and 
many others recognise the opportunity for profit along this line, 
and conduct their businesses accordingly. The resulting com- 
plication in the theory of monopoly price is easily understood 
from what has already been said. Instead of making calcula- 
tions in reference to consumers' demand as a whole, the 
monopolist makes special calculations in regard to the extent 
and the intensity of the demand of each class of consumers. 
He offers the " superfine " grade of his product at a price com- 
mensurate with the adjective used to designate it. The 
" superior " article is put on the market at a price calculated to 
attract the comfortable middle class, which appreciates quality 
but is not prepared to disregard altogether considerations of 
expense. Finally, a price is made for the simple article which 
will comm.end it to the rank and file of consumers who are com- 
paring it with substitute articles and anxiously considering 
which is, on the whole, the best for the money. 

The law of monopoly price may be summed up in the maxim. Final 

ask that price which is calculated to yield in the long run the Statement 

1 n rj^ ■, • , •, ..... of Law of 

maximum monopoly profit. To decide what this price is m Monopoly 

any given instance, the monopolist must gauge the extent and PJ'ice 
intensity of consumers' demand both as a whole and as mani- 
fested by different classes of consumers. He must then calcu- 
late his own expenses of production for different quantities of 



Reasons 

for 

Concealing 

Monopoly 

Profits 



Methods 

of 

Concealing 

Monopoly 

Profits 



198 Distribution : Monopoly Profits 

the monopolised good. His first concern will be usually to put 
out the standard grade of the commodity he produces at a 
price that will afford the largest monopoly profit. This may 
be a high price, but if the demand is elastic it is more likely to 
be moderate or even low, especially if the expenses of produc- 
tion per unit diminish as the volume produced is increased. 
Having fixed the price for the standard grade, the monopolist 
will consider whether it would not be profitable to offer 
superior, superfine, or other grades to particular classes of con- 
sumers at higher prices. In connection with each grade he 
must make a calculation similar to that originally made, and 
he must also consider how the sales of these superior grades 
will react on the sales of the good of standard quality. 
Whether he will put out special grades and how many he will 
put out will depend upon the special character of the demand 
for his product. 

§ 114. Monopoly profits have never been looked upon with 
favour in the United States. Even the suspicion that they were 
being enjoyed has sufficed often to disturb the conditions which 
made them possible, either because consumers have combined 
to boycott the monopolised good or because the Government 
has interfered. Under such circumstances it has been but 
natural for monopolists to devise numerous expedients for 
concealing their real earnings. 

For personal monopolies to deceive the public as to the profit- 
ableness of business activity is an easy matter, but it is less so 
for corporations with monopoly powers. However secretive the 
latter may be in regard to their methods of doing business, they 
'are compelled on sharing their earnings among their stockhold- 
ers to disclose the amount of these earnings to a number of 
persons. The stock of a small corporation may be so narrowly 
held that secrecy even in reference to dividends is possible, but 
this is rarely the case with large corporations. The latter 
can conceal their profits only by distributing them in other 
forms than dividends to stockholders, or by inflating their 
capitalisation so that large dividends may be paid without ex- 
ceeding a moderate rate of return on the nominal capitalisa- 
tion. A few words may be said about each of these methods. 
Directors may expend surplus earnings for additional equip- 



The Over-capitalisation of Mooopolies 199 

ment, patents, or other property at greatly inflated valuations. 
By this means monopoly earnings are diverted to the owners 
of the properties purchased, who may be the directors them- 
selves or their friends. This method may conceal the monopoly 
profits even from the stockholders, who continue to receive only 
moderate dividends. Somewhat similar, and even more com- 
mon, is the practice of dividing monopoly profits among the 
higher officials of the monopolistic corporation in the form of 
large salaries. It is a familiar fact that monopolies are good 
employers. They frequently pay wages above the competitive 
rates even to their ordinary workmen. To some extent, and 
perhaps fully as regards the lower grades of labour, this policy 
is justified by the better service that it secures. It is not, how- 
ever, confined to the ordinary grades of labour, but applies in 
extreme form to salaried officials. These men are in a posi- 
tion to bring influences to bear on boards of directors to have 
their salaries increased to much more than they could hope to 
earn if they were engaged in competitive industries. Some- 
times they are themselves large stockholders in the enterprises 
which they manage ; at others their knowledge of the business 
may be valuable to the corporation because they are in posses- 
sion of secrets which it would be highly disadvantageous to 
have made public. To insure their continued loyalty to the 
interests of the monopoly they must be well paid for their 
services. On these and other grounds monopoly profits are 
often hidden in salaries much above what entrepreneurs direct- 
ing competitive businesses could afford to pay for similar 
grades of service. 

The most common expedient of all for concealing profits is The 
the practice of inflating the capitalisation of the corporation, tal^atk*^ 
Where a business is organised by shrewd men who foresee its ot Mouop»= 
monopolistic possibilities, it is usual to start with a grossly in- porations 
flated capitalisation. In the railway business, for example, it 
has not been unusual to secure all of the capital required by the 
sale of bonds and to distribute the stock as a pure bonus. In- 
dustrial combinations as organised in the United States accom- 
plish the same result by putting out preferred stock equiva- 
lent to the actual capital invested in the business and an equal 
or even larger amount of common stock as a bonus. In these 



Stock 
Watering 



Difficulty 

of 

Measuring 

Monopoly 

Profits 



Funded 
Income 
Defined 



2CX) Distribution : Monopoly Profits 

and other ways the nominal capital of an enterprise may be 
made from the first, two, three, or even five or ten times the 
amount actually invested in it. Such an arrangement permits 
directors to distribute very large profits as dividends on the 
nominal capital without exceeding the ordinary rate of interest. 

It often happens, even when large monopoly earnings are 
anticipated, that the nominal capitalisation is not made large 
enough to conceal them. In such cases, and in the more usual 
cases in which actual and nominal capitalisation start together, 
the practice of " watering " stock to conceal excessive earnings 
is frequently resorted to. This consists simply in issuing new 
stock for which no equivalent investment is required. It may 
be accomplished by means of a stock dividend, each share- 
holder being given an amount of new stock proportional to his 
original holding ; or by the issue of new stock for subscription 
at a nominal price, subscriptions being open only to share- 
holders, directors, or other favoured investors. By these 
means the nominal capitalisation may be expanded to keep 
pace with earnings and to permit the distribution of the latter 
without any apparent increase in the dividend rate. 

The above ways of concealing monopoly profits have been 
resorted to so generally by monopolistic corporations in the 
United States that the casual student of the reports of some 
of the most successful of these enterprises would never suspect 
that their earnings were larger than those of competitive busi- 
nesses. To show that they are so in fact requires a full knowl- 
edge of the operations of such corporations from the time they 
were first organised. In most cases such knowledge is con- 
fined to those most interested to keep it secret and in conse- 
quence it is rarely possible for an impartial investigator to de- 
termine what part of the earnings of a monopolistic enterprise 
represents a fair interest on the capital actually invested in it 
and what part monopoly profit. 

§ 115. One consequence of the policy of concealing profits is 
that the business community no longer regards nominal capital- 
isation as a fair criterion of capital value. It is so habituated 
to the practice of adjusting capitalisation to earning power that 
it readily accepts the latter as the real test of what the capital 
ought to be. Thus a business which earns $80,000 a year over 



Investors and Monopolies 201 

and above its expenses of operation, when the rate of interest 
on investments involving similar risks is 8 per cent., is taken to 
be worth $1,000,000, without much reference to the tangible 
capital invested in it. If the business is organised as a cor- 
poration with 10,000 shares of capital stock the shares will be 
quoted at $100. This procedure may be described as capitalis- 
ing income. Income which is thus capitalised is sometimes 
spoken of as funded income to distinguish it from simple inter- 
est on capital invested in competitive industries. The monopoly 
profits of corporations are one, but by no means the only, type 
of funded income. 

The practice of capitalising income or of putting valuations The Role 
on monopolistic and other sources of income in proportion to ° innocent 
the returns which they afford, gives rise to vested interests in Investor" 
the established order. " Innocent investors " buy shares of connection 
stock in monopolistic corporations, paying for them prices pro- with 
portioned to the monopoly earnings that are being realised, and ^ 

then claim the protection of the government against reformers 
who characterise monopoly profits as unearned and advocate 
their confiscation. The advantage of this kind of support to 
promoters of monopolistic undertakings is so obvious that they 
not infrequently, especially in connection with local monopolies, 
make special efforts to insure the wide distribution of the stock 
of their companies in the localities to be exploited. If persons 
of light and leading in such places can be persuaded to be- 
come stockholders the likelihood of government interference 
as profits grow is greatly lessened. In time innocent invest- 
ors may come to control entirely corporations of this char- 
acter through the silent withdrawal of the original pro- 
moters to other fields. Under such circumstances the claim 
that the monopoly profits are no more than a fair return 
on their bona fide investments may be advanced by the stock- 
holders with much force. Most of the older natural monopo- 
lies in the United States have already reached this stage. Any 
proposal to curtail their monopoly earnings by fixing the prices 
they may ask for their services or by requiring from them 
extraordinary contributions to the support of the state is met 
by the objection that they pay no larger returns to those 
interested than competitive businesses, and should therefore be 



Monopoly 

is Not 

Necessarily 

Antago- 

iiistic to 

Public 

Interest 



Desirable 
Monopolies 
Should Be 
Rjigulated 



Monopoly 

Profits Not 
Always 

Large 



202 Distribution : Monopoly Profits 

no more subject to government control or taxation than the 
latter. How serious an obstacle this argument opposes to 
efforts to secure for the general public a share of the benefits of 
monopoly is familiar to everyone who follows current discus- 
sions of the monopoly problem. 

§ ii6. There is a widespread impression in the United 
States that monopolies are always and unalterably opposed to 
the public interest. This is based partly on experience of the 
bad phases of m^onopoly and partly on the teachings of jurists 
and economists. American courts uniformly declare monopoly, 
except that created by the government itself in the exercise of 
its constitutional powers, illegal. Economists are equally prone 
to characterise monopoly as abnormal and to extol an indus- 
trial system of free, all-sided competition, as that best calcu- 
lated to promote the general interest. There is, of course, 
good reason for this distrust of monopoly, but if the analysis 
we have given of the different kinds of monopolies and of the 
restraints under which they exercise their powers is accurate, 
it ought not to be extended to all without qualification. For 
some industries monopoly is not only as normal and inevitable 
as is competition for other industries, but it is the form of 
organisation that best serves the public interest. Natural 
monopolies of organisation, for example, are monopolies be- 
cause as such they can produce more economically than could 
competing firms. For them the monopoly form of organisa- 
tion is the desirable form, which should be encouraged rather 
than discouraged by those who have the public interest at 
heart. 

It is not proposed in this chapter to discuss practical phases 
of the monopoly problem, but it may be remarked in passing 
that what the public interest requires is not so much the com- 
plete suppression of monopoly as the suppression of monop- 
olies which are managed with sole reference to monopoly 
profits. Desirable monopolies should be fostered, but they 
need also often to be regulated if they are to render the largest 
social service of which they are capable. 

Another misapprehension that is current is that monopoly 
always means large monopoly profits. Perhaps the easiest way 
to disDel this illusion is to call attention to what would happen 



Monopoly Profits and Other Shares 203 

if every line of business were to become a monopoly. In that 
case the combinations of entrepreneurs controlling different 
branches of production would be no better off, so far as profits 
are concerned, than they are now, when most lines of business 
are competitive. Their efforts to raise prices would be coun- 
terbalanced by similar efforts on the part of other entrepre- 
neurs. This must be the case because exchange values are at 
bottom ratios, and efforts to enhance both terms of every ex- 
change ratio must leave them very much as they were before. 
No more wealth would be produced and consequently there 
would be no more to distribute as profits or as any other share. 
The actual situation is, of course, very different from this 
assumed case, but the limitations on the powers of monopolists 
which it presents are also quite effective. The power con- 
sumers possess of substituting other goods for those monopo- 
lised, and the danger that competition will be excited, are ever- 
present forces that confine monopoly profits in most businesses 
within narrow limits. 

§ 117. Monopoly was expressly excluded from what we The 
have styled the state of normal equilibrium, not because it is ^ thence 
considered abnormal or even unusual, but because it is easier Monoply 
to trace its influence when it is studied in isolation. In actual ^^^ other 
industrial society competitive and monopolistic enterprises are Shares in 
carried on side by side and act and react upon each other, jjqq 
The influence of monopoly should be briefly indicated before 
we turn to a discussion of the competitive shares of income — 
rent, wages, and interest — treated in the following chapters. 
To secure monopoly profits monopolists must fix the prices of 
their goods somewhat above their expenses of production. In 
the example given in an earlier section the largest monopoly 
profit was secured when the price of the patented soap was 
fixed at ten cents. The expenses of production for the 2,5cx),ooo 
cakes that could be sold at that price averaged only five cents, 
so that the effect of the monopoly was to make the price double 
what it would have been had competition had free play. To 
maintain the price at ten cents the monopolist must of course 
limit production to the 2,500,000 cakes which the public will 
take at that figure. If competition forced him to lower the 
price to six cents he could produce and sell, according to the 



Practical 

Phases of 

Monopoly 

Problem 

Treated 

in Later 

Chapters 



204 Distribution: Monopoly Profits 

conditions of the illustration, 6,000,000 cakes. At the price 
corresponding- exactly to the expenses of production, hve cents, 
he could sell a still larger product. The effect of monopoly is»^ 
accordingly, to reduce the amount of the monopolised good 
that is produced and sold below what it would be under condi- 
tions of free, all-sided competition. Only through such reduc- 
tion or curtailment of the supply can the coveted monopoly 
profit be secured. But reducing the output of the monopo- 
lised good involves the employment by the monopolistic enter- 
prise of less land, labour, and capital than would be needed in 
the same branch of production if competition had free play^ 
The effect of monopoly is thus to increase the supplies of the 
factors of production which must find employment in competi- 
tive industries. What influence this mal-distribution of the 
factors of production is likely to have on the shares of income, 
rent, wages, and interest, can only be explained after we have 
considered how these shares are determined. Such influence is 
of course supplementary to the tax on all consumers who buy 
monopolised products, resulting from the enhancement of their 
prices. 

The phases of the monopoly problem that have assumed 
greatest importance in the United States concern legal and 
natural monopolies, trusts, and labour monopolies, and these 
are treated at some length in later chapters (XXL, XXIII. , 
XXIV., and XXV.). The reader will find in them many 
concrete details and illustrations which out of consideration 
for space have been omitted from the preceding sections. 



REFERENCES FOR COLLATERAL READLNG 

'''Marshall, Principles of Economics, Book V., Chap. XIII.;*^/y, 
Monopolies and Trusts, Chaps. I. -IV.; * Bullock, Introduction to 
the Study of Economics, Chap. XI.; * Fetter, Principles of Eco- 
nomics, Chap. 33. 



CHAPTER XII 

DISTRIBUTION: RENT ^^ 

§ ii8. In the preceding chapters the more or less irregular Contrast 
and uncertain shares in distribution have been discussed. Com- Profits 
petitive profits rise and fall and for entrepreneurs as a whole, |"^ Other 
except m periods of mdustnal expansion, are as likely to in Dis- 
take the form of losses as of gains.* Monopoly profits are tnoution 
more stable and in the aggregate constitute an important 
part of the community's income, but the conditions upon 
which monopoly depends are subject to change ; the tastes 
of consumers may be modified or substitute articles may be 
put upon the market ; new methods of production may be de- 
vised which deprive the monopoly of its advantage, or the 
strong arm of the law may be interposed to divert monopoly 
profit to the public either by the forcible lowering of prices or 
through taxation. In these and other ways monopoly profits 
may be reduced or entirely cut off before they have been 
enjoyed for any long term of years. In contrast with profits, 
the elements entering into the normal expenses of production 
— rent, wages, and interest — are regular and persistent. Their 
payment is not due to the absence of competition, but is the 
direct consequence of the activity of competitive forces. The 
keener and more general competition is the more certain and 
definite these shares become. For this reason in explaining 
them it will be convenient to revert often to the relations that 

*The German economist, von Thiinen, advanced the theory that 
competive profits must in the long run be on the positive side, because 
entrepreneurs take great risks and must be compensated for so doing. 
This depends, obviously, upon whether taking risks in the industrial 
society under consideration is distasteful. In the United States there 
are so many people who really like to take risks that compensation for 
risk-taking is a negligible element in profits. 

205 



2o6 



Distribution : Rent 



The 
Nature 
of Rent 



Problems 
Connected 
with Rent 



The 
Source 
of Rent 



Principal 
Grades of 
Land Dis- 
tinguished 



would prevail in an industrial society brought to the state of 
normal equilibrium. In such a society the relations which 
economic forces tend to establish in the actual industrial world 
are sharply defined and may be easily apprehended. 

§ 119. Rent is the term given in economics to the share orf 
income that is assigned or paid to owners of land, sources of 
water power, and other gifts of nature which assist production, 
for the use of these factors. When the factor is used by the 
owner himself, rent is a part of the gross return that he 
realises from his year's business and is, economically, as 
distinct from his other income as it would have been had 
he leased the factor at a stipulated rental from some other 
owner. 

A complete study of rent involves two distinct lines of in- 
quiry. First, it must be explained why rent is paid and what 
determines its amount. These are purely scientific questions. 
Secondly, it must be considered whether the present system of 
allowing the earnings of land and other gifts of nature to go 
to the individuals whom the law designates as their owners is 
socially defensible. This also is a scientific question, but its 
answer depends upon moral, political, and social considerations 
which are still matters of dispute even among the most intel- 
ligent and best-intentioned. In this chapter attention is con- 
fined to the explanation of rent. 

§ 120. The source of rent has already been indicated in Chap- 
ter VI., Section 63. It was there shown that land and natural 
powers assist production unequally in different situations and 
that rent is what entrepreneurs pay for the use of superior land 
and sources of power to equalise conditions. 

In a country like the United States land is divided up into 
hundreds of different grades to be applied to as many different 
productive uses. To simplify the explanation we will assume 
that these different uses of land may be included under five 
heads as follows: Grade A, Sites for City Stores; Grade B, 
Sites for City Residences; Grade C, Truck-farming Plots; 
Grade D, Wheat Land ; Grade E, Grazing Land. The relation 
between these different grades of land may be represented with- 
out great inaccuracy as that between the areas enclosed be- 
tween concentric circles, as in Figure 7. 



Plots Devoted to Truck-farming 207 




E E 



Fig. 7. 

At the centre (A) is the land devoted to store sites, which is Store Sites 
economically the most important use. For purposes of trade 
central situations must be selected. These are also desirable 
for residence purposes, but inasmuch as a residence site serves 
but one family, while a store site serves many families of cus- 
tomers, the store use triumphs. 

Next to the store sites in a city are residence sites (B), which, Residence 
other things being equal, are desirable in proportion to their 
nearness to the business centres. Many lots are just on the 
borderland between these two uses. It is just worth while for 
storekeepers to pay a little higher rent for them than they com- 
mand as residence sites, or not quite worth while. 

Beyond the residence sites are plots devoted to truck-farm- Plots 
ing (C). In every city the line is somewhat roughly drawn to^Tru^ck- 
between these two grades, and some land is found in a transi- farming 
tion stage which may be had for truck-farming at a very 
moderate rental on condition that the lease shall be terminable 
at the will of the owner. In spite of this complication it is 
not difficult to find city lots that have just been withdrawn from 
use for farming and truck farms that are coming to be so 
much in demand for residence purposes that the owners are 
seriously considering giving them up to real-estate operators. 
These are the borderlands between grades B and C. 



2o8 Distribution : Rent 

Farm Land All land good enough and near enough to a market to be 
Proper ^g^^ ^^^ truck-farming might be used for the cultivation of 

some staple crop like wheat. That it is not is proof that truck- 
farming causes it to yield a higher rent than would wheat- 
farming. Trucking is economically a more important use, 
chiefly because green vegetables will not stand distant trans- 
portation as will wheat and other staples. On the outer cir- 
cumference of the belt of land devoted to truck-farming 
will be found acres which it does not quite pay to use for 
this purpose and which are cultivated extensively for some 
staple crop. These are the borderlands between grades C 
and D. 
Grazing The transition from arable farming to grazing occurs simi- 

larly at the outer circumference of the lands devoted to the 
growing of wheat. Land too remote or too poor to be sowed 
with a wheat crop is yet well adapted to the grazing industry 
and may afford a moderate rental in comparison with the land 
still more remote and still poorer which it barely pays to de- 
vote even to this economically least important industry. Be- 
yond this last land at the circumference of the grazing belt is 
still more land (F) that in the country's present stage of in- 
dustrial development is economically useless and therefore 
valueless. Under the Homestead Acts lands of this grade 
may be had almost free of charge from the government 
Practically speaking, it is no-rent land, and so long as any con- 
siderable amount of it remains open to settlers it furnishes a 
no-rent margin from which all rent is calculated in the man- 
ner described below. 
Fertility as In this classification more attention has been given to situa- 
asSitu^ion *^^" ^'^^^ ^^ fertility or other qualities as a guide to grading 
in_ Deter- lands, because it is the phase of the subject most apt to be neg- 
Rent lected. The reader scarcely needs to be reminded that the 

other qualities enumerated in Chapter VI. are quite as potent 
factors as situation in determining where a piece of land be- 
longs in the economic scale. In the case of lands whose 
products are of high value in proportion to their bulk, situa- 
tion counts for little in comparison with the richness of the 
source of supply. This is illustrated by the fact that the gold 
resources of the Klondike are being exploited nearly as rapidly, 



Demand for Land of Different Grades 209 

in spite of the remoteness of the region, as those of Cripple 
Creek. 

§ 121. To the successive grades of land that have just been The 
described the reader must oppose in his imagination the market for Land oi 
for the goods which land and the other factors of production Different 
unite to produce. First comes the demand for lots for busi- 
ness purposes. Entrepreneurs appreciate the importance of 
location as a condition to business success. The best sites are 
eagerly taken and, as the community grows, new lots are each 
year withdrawn from tlieir old use as residence sites because 
business men are willing to pay a little more rent for them. 
Improvements on the land interfere somewhat with the free 
play of this tendency, but even the most substantial buildings 
decay in time and if a broad view be taken there will be found 
enough plots to pass each year from use as residence sites to 
use as store sites to maintain a practical equilibrium. 
Different kinds of businesses, railway transportation, whole- 
sale and retail trade, banking, etc., require lots in different 
situations, and all such differences have their influence on rents. 
We shall not be far wrong, however, in assuming that 
business men require centrally located lots, the lots em- 
braced in the inner circle, A, in the figure. In deciding what 
rent he can afford to pay for a given store site, the entre- 
preneur never thinks of comparing it with farming land 
on the outskirts of the city. He knows that unless he estab- 
lishes himself within a limited area he might as well not go 
into business. To him marginal lots are not those on the out- 
skirts of civilization which he could get for nothing, nor even 
those on the outskirts of the town whose rent is low, but the 
choice residence lots on the border between grades A and B, 
for which he must pay a high rent because of the demand for 
them for residences. To this marginal rent, which all entre- 
preneurs must pay for lots in A, is added a differential rent 
for the better lots corresponding to their superiority. The 
choicest lot of all yields the highest rent, and this is what it 
adds to the returns of a representative firm for a given outlay 
in wages and interest in that line of business which depends 
most on situation for its success, retail trade. The practical 
determination of this rent is a matter of considerable difficulty. 



2IO 



Distribution: Rent 



Rent 

Iiicltides 

ijsaally a 

Marginal 

as well as a 

Differential 

Element 



The 

Calculation 
of Rent 



and it is doubtful if the exact competitive rent is ever paid for 
such a piece of land. Something approximating this amount is 
paid, however, or is charged to the account of rent by the 
entrepreneur who owns the site on which his business is 
located. From this maximum the rents of inferior lots de- 
crease to the marginal rents which those on the border com- 
mand. In each case rent figures as one of the expenses of 
production which the practical business man counts on recov- 
ering in the price. 

The determination of rents of residence lots is effected in 
exactly the same way. From the highest rent of the best lot, 
which corresponds to the lowest rent for a lot of grade A land, 
to the highest rent truck-farmers are willing to pay for border 
lots between B and C, there is the same gradual descent, in- 
fluenced in this case by calculations of utility ratlier than of 
business returns. To tlie extent that personal considerations 
weigh more in the choice of homes than in the choice of busi- 
ness locations, these calculations of utility are variable, but 
when we are considering the thousands of people of each social 
class that make up a city population these personal eccentrici- 
ties neutralise each other and may be disregarded. For those 
who reside in cities as well as those who do business there the 
choice is not between rent and no-rent, but between high rent 
and marginal rent. Lots to be had for nothing are so far away 
from the places where city dwellers earn their livelihoods that 
they are worth to them considerably less than nothing. 

The rent paid by the truck-farmer, or credited by him to his 
land of grade C, obeys the same principles that have been out- 
lined. According to the situation, fertility, etc., of the land it 
pays a rent ranging between that which the best truck land 
affords, the marginal rent for grade B, and the rent which 
must be paid for the borderland between C and D to keep it 
from the wheat farmer, or more accurately which as wheat land 
it would afford. Similarly the wheat farmer pays a marginal 
rent to cover what the poorest wheat land would be worth for 
grazing purposes. The grazier himself is surrounded by land 
of a still lower grade, F, which is still in the category of free 
goods. This margin is accordingly a no-rent margin and the 
pfice of his product need under normal conditions merely cover 



Summary of Explanation of Rent 2 1 1 

the expense for wages and interest on the poorest land on 
which cattle, sheep, and horses are raised. 

From this explanation it appears that the rent paid for any 
piece of land above that in the lowest grade includes a marginal 
and a differential element. It must be as high as the rent 
earned by the best land of the next lower grade or it would 
itself be transferred to that grade. It must also be higher than 
the rent paid for the poorest land in its own grade by an 
amount corresponding to its own superiority for the given 
purpose. Only grazing land, or land which is at the bottom 
of the economic scale, has its rent determined by comparing its 
properties with those of land which affords no rent at all. The 
marginal land for lands of higher grades is always a rent- 
paying land, and for the highest grades the amount of rent 
paid on the margin is very considerable. 

§ 122. The determination of rent on different grades of land 
may be represented graphically by the following figure : 

Y 



Summary 
of Ex- 
planation 
of Rent 




Graphic 
Represen- 
tation of 
the Theory 
of Rent 



D C" C G 



Fig. 8. 



As in the previous section, it is assumed in the above figure 
that the land of the country is assigned to five different uses 



212 



Distribution : Rent 



The Rent 
of Land of 
Grade D 



The 
Total Rent 



Other 
Causes 
of Rent 



ranging in importance from sites for business blocks to ranches 
for grazing purposes. At the margin for land of grade E the 
product, or the purchasing power represented by the product, 
will just cover the expenses of production in wages and 
interest — allowing, of course, for the replacement of capital 
goods — and will leave nothing over for rent, since it is no-rent 
land. Representing the return at this margin for each unit of 
labour and capital by the length of the line B C, the return for 
a like outlay on better grazing land should be represented by 
longer Imes such as B' C or B" C". If all land used for grazing 
is considered, the relation between the whole return and the por- 
tion assigned to rent will be represented in the area B C D A. 
C D will here measure the number of units of labour and 
capital applied to all land, and since the return to one unit on 
the margin is B C, and since competition will tend to make all 
accept the same remuneration, the parallelogram B C D L will 
represent the total assigned to wages and interest, and the tri- 
angle B L A the surplus product obtained on the better graz- 
ing land, or the rent. 

The marginal land of grade D yields a return to each unit of 
labour and capital equal to the length of the line D A, since it is 
superior grazing land. Of this return L D remunerates labour 
and capital and L A constitutes rent. Representing the pro- 
duce of all of the land of grade D by the area A D E I, we 
have here L D E M as wages and interest and A L M I as 
rent. 

The division of the product obtained from lands of grade 
C, B, and A is similarly represented. In each case there is a 
considerable rent on the marginal land to be added to the differ- 
ential rent resulting from the superiority of each piece of land 
above the margin for the particular use to which it is applied. 
The whole rent of land is represented in the figure by the area 
B R Y. As a whole it is a differential return measured from 
a no-rent margin to be contrasted with wages and interest de- 
termined, as is explained in the following chapters, by the pro- 
ductiveness of labour and capital at this margin. 

§ 123. In the above explanation of rent attention has been 
confined almost exclusively to land in the narrow sense. The 
rent earned by sources of water power and by mines is deter- 



The Rent of Mines 213 

mined in a similar way, but perhaps deserves separate con- 
sideration. 

The utilisation of water power involves usually a consider- The 
able outlay of capital, and hence the marginal powers used must ^^^^ 
afford a large return for interest on the capital invested even of Water 
though they yield no rent. In connection with the use of ^^^^^ 
water power situation is also an important factor. It is profit- 
able to use the power of Niagara because it is surrounded by a 
rich agricultural and manufacturing country. Much cheaper 
sources of power are not yet utilised west of the Mississippi 
because other conditions are not favourable to the development 
of industries to which the power might be applied. From the 
marginal source of power in use, which affords no rent, the 
rents of superior or m.ore favourably located sources of power 
are calculated by the familiar comparative method. Ordinarily 
water power is utilised by the entrepreneur who owns it, and 
hence its rent appears only as an item in his private book- 
keeping. Competing with water power are steam power, horse 
power, etc. The price at which any substitute power can be 
obtained for the performance of a given industrial task consti- 
tutes a maximum above which the rent of water power can- 
not for any length of time be maintained. 

The rent of mines is determined in the same way as the rent The Rent 
of land, except that the marginal mine is not necessarily one ° '°^^ 
v/hich affords no rent. Since a mine will not renew itself, but 
by each year's oj>erations is depleted of so much of its ore, the 
rational owner hesitates to work his mine when it barely pays 
expenses. The ore is a valuable asset, and the owner is short- 
sighted who takes it out to sell at cost. In practice this con- 
sideration is not very important. Mining is so uncertain 
that in nearly every branch of the industry mines are op- 
erated at cost or even at a loss by men who hope that the 
ore will get richer with depth or that the price of the 
mineral will advance. As a matter of fact, therefore, it is 
usually possible to find no-rent mines producing each variety 
of mineral that comes out of the earth. The rent of better 
mines is measured up from them as a no-rent margin. When 
mines are operated under lease the rent is usually calculated as 
a royalty proportioned to the amount of ore actually removed 



214 



Distribution: Rent 



Apparent 
Exceptions 
to the Lav/ 
of Rent 



The 

No-rent 
Margin 
Found in 
Connection 
with 
Various 
Uses of 
Land 



The 

RotiLtion 
of Crops 
Compli- 
cates but 
Does Not 
Contradict 
the Law 
of Rent 



from the ground. Under this system when mines are operated 
literally at cost in wages and interest, the royalty represents an 
actual loss to the operator. This is usually an effectual bar to 
the operation of no-rent mines by other entrepreneurs than 
those who own them, but since the lease system is excep- 
tional rather than the rule, this does not prevent the presence 
of no-rent mines in nearly every branch of the mining 
industry. 

§ 124. In the graphic illustration just given, land is repre- 
sented as though it were perfectly graded from best to poorest, 
and it is implied that the location of a given piece of land in the 
particular grade to which it belongs is a simple matter. There 
are several well-known facts in regard to land, sources of 
water power, and mines which are inconsistent with these 
assumptions, and we should now inquire whether these facts 
invalidate the explanation of rent which has been given : 

I. There is not merely one use to which land is applied down 
to a no-rent margin, but several uses. In the United States 
some wheat is probably raised regularly on no-rent land and a 
good deal of corn is so produced. In these cases the rents of 
better wheat and corn lands are measured from the no-rent 
margin just as are those of the better grazing lands. Instead 
of having one no-rent margin we have several, but their col- 
lective influence on rent is no different from that traced to a 
single one. 

II. In farming in the United States the tendency is more 
and more towards the diversification of crops. No one crop is 
raised continuously, but different crops are raised in rotation, 
and the productiveness of the land depends not upon its yield 
of wheat or corn or cotton alone, but upon its yield of all of 
the different crops grown over a series of years. Although 
this greatly complicates the rent problem it does not change the 
principles upon which rent depends. The tendency is still to 
devote each piece of land to the use for which it is econom- 
ically best adapted. If this is diversified farming, then the 
average return in the different crops in the rotation for a series 
of years must be calculated and made the basis for comparing 
it with other pieces of land. Through the indirect process de- 
scribed it will be compared finally with no-rent land on the 



Basis for Calculating Rent 215 

margin, and the surplus return it affords in comparison with 
no-rent land will be its rent. 

III. No piece of land yields exactly the same return, even The 
though cultivated in just the same way, two years togetlier. Return the 
The weather is a capricious partner upon which every farmer Basis for 
depends, and as a result of weather changes large crops are Rent "^ 
sometimes followed by small crops in spite of everything the 

farmer can do. These variations affect rent only by making it 
less a matter of mathematical calculation and more a matter of 
approximate estimate. Uncertain as is the outcome of each 
year's farming, the average return for a series of years may 
be foretold with a good deal of accuracy. It is these averages 
that should be and are considered in calculating the rent prop- 
erly ascribable to a piece of land. 

IV. Some pieces of land, such as the barren rock of par- Land Fit 
ticular lots in New York City, are well adapted to one purpose, ^j| y^ 
but unsuited to any other. Yet the absence of possible sub- May 
stitute uses does not prevent such pieces from commanding High Rent 
often very high rents. This is no real exception to the theory 

as explained. The primary cause of rent is the demand for 
land for industrial uses. If the possible uses are arranged in 
a scale in the order of their importance, then the best land for 
the purpose will be assigned to use A down to the point where 
a given piece is even better adapted economically — will yield a 
larger return — in use B. That some pieces admirably suited for 
use A would not serve use B or any other use at all simply les- 
sens the requirements for land for use A that will serve use B. 
The result is a somewhat lower rent margin between A and B 
which communicates itself all along the line. Land adapted 
for one purpose only, if used at all, is of necessity devoted to 
that purpose and affords a rent depending upon the way in 
which it compares with marginal land used for the same pur- 
pose. If it is the only land for the purpose, as a single rock 
projecting out of the sea is sometimes the only available site 
for a lighthouse, it may command a monopoly rent corre- 
sponding to the intensity of the want it satisfies. Unique situa- 
tions of this sort usually belong to the government and there- 
fore the calculation of their rent is of little practical interest. 
There are other apparent exceptions to the theory, but the 



2l6 



Distribution: Rent 



Other 
Exceptions 

Obstacles 
to the 
Exact 
Calculation 
of Rent 



Invest- 
ments of 

Capital in 
Land 

and Rent 



reader's own ingenuity will determine whether and to what 
extent they modify it in operation. 

In an industrial society approaching the state of normal 
equilibrium competition would assign each piece of land to 
that particular use for which it was best adapted, and once 
assigned each piece would continue to be used for the same 
purpose as long as the state of equilibrium was maintained. 
In such a situation rent would be so constant that its calcula- 
tion would be a very simple matter. The rent problem is com- 
plex in actual industrial society because pieces of land are con- 
stantly being assigned to new uses. New pieces of land are 
being brought under cultivation or are being improved witli 
buildings, while old pieces of land are being abandoned or the 
buildings on them are being destroyed. Under these circum- 
stances the calculation of rent can be at best but an approxi- 
mation, and there is latitude for no little disagreement as to 
what should be paid for or credited to each piece of land that 
aids in production. In comparison with the gross amount of 
rent, however, the sums involved in these possible variations 
are small and may without serious error be disregarded when 
the broader problems of economics are under consideration. 

§ 125. The difficulty of distinguishing between land and 
capital in the form of permanent improvements has already 
been alluded to. Once made, investments of capital in 
permanent improvements are merged in the land, and the In- 
comes they afford obey the principles just laid down in 
reference to rent rather than those about to be explained 
as applying to interest. For example, consider the return 
on the investment of capital necessary to clear land and 
prepare it for the first time for cultivation. Unless the rec- 
tum promises to be large enough to pay the current rate of 
interest on the investment it will not ordinarily be made, 
but after it has been made the cleared land affords an income 
in no wise controlled by the amount of the investment. All 
the labour of New England farmers during the seventeenth and 
eighteenth centuries in clearing their farms of stones and im- 
proving them in other ways did not avail to check a rapid fall 
in the incomes they afforded to their descendants so soon as 
they came into competition with the better lands of the Miss- 



The Capitalisation of Rent 217 

issippi Valley. The abandoned farms of the former section 
bear eloquent testimony to the fact that interest can be con- 
tinuously secured only for capital that may be withdrawn 
and reinvested as often as changes in industrial conditions 
make this desirable. As soon as capital becomes embodied in 
fixed and unalterable capital goods, the income it affords ceases 
to obey the principles determining interest and becomes sub- 
ject to the law of rent. Most improvements, however, are not 
fixed and unalterable, but wear out and have to be renewed. 
They require, therefore, a continuous reinvestment of capital, 
which will only be made on condition the income secured cor- 
responds with the rate of interest to be obtained in other Hues 
of investment. In this indirect way the return on perishable 
improvements is adjusted to the current rate of interest. 

§ 126. In Section 115, Chapter XL, attention v^as called to The Capi. 
the business man's method of putting a price upon a monopoly ^^ Rent '^ 
or any other fairly permanent source of income. It was there 
shown that the annual return from the monopoly was capital- 
ised at the current rate of interest and that the result, with 
ample allowance for risk, etc., was the amount at which the 
monopoly would be valued. Exactly the same method is ap- 
plied in the valuation of land. The rent, less deductions for 
taxes and other necessary expenses, is capitalised at the cur- 
rent rate of interest, and the result is the normal price of the 
land, about which its market price fluctuates. For example, 
if a given piece of land is found by experience to bring in on 
an average a net rent of $1200, and the current rate of interest 
is 6 per cent., its price should be $20,000, or the sum which in- 
vested at 6 per cent, would yield the same return. If the rent 
is only $600 the price will be only $10,000. On the other hand, 
if in the first case the rate of interest should be 4 instead of 
6 per cent, the price of the land would be $30,000. The price 
of land thus varies directly with the amount of its rent and 
inversely with the rate of interest. In a developing country 
like the United States the probability is so strongly in favour 
of an increase in rents, especially in the case of city lots, that 
shrewd investors are willing to accept evCii less than the cur- 
rent rate of interest from their investments in land. In such 
cases the present value of a lot may be the capitalised value, not 



2l8 



Distribution: Rent 



Rent a 
Funded 

Income 



bummary 
of the 
Theory 
of Reiit: 

Its Catise 



Includes 
Usually a 
Marginal 
as well as a 
Differential 
Element 



But 

MayBe 

Calculated 

from the 

Intensive, 

No-rent 

Margin 



of its present, but of its prospective rent. Land has been on the 
whole an excellent investment in the United States during the 
last thirty years, in part because the rent it affords has so gen- 
erally risen, but quite as much because the rate of interest has 
fallen and the prices of pieces of land have risen even more 
than the rents. The latter point must be remembered in con- 
nection with the interpretation of statistics showing the growth 
of wealth. In countries experiencing a declining rate of 
interest there is an appreciation of land and other permanent 
sources of income without any corresponding change in the 
ability of these factors to contribute to general well-being. 

In the same way that the designation " funded income " was 
applied to monopoly profits it may be appropriately applied to 
rent. Funded income differs from interest in that the latter is 
in proportion to the amount of capital actually invested in an 
enterprise, while the former is itself the basis by which the 
capitalised value of the source from which it is derived is 
determined. 

§ 127. The explanation of rent that is given in this chapter 
and Chapter VI. may be summarised as follows : 

1. Rent is an income which arises from the superior pro- 
ductivity of land above the margin in comparison with that at 
the margin. 

2. Marginal land for some of the uses to which land is put 
is actually no-rent land. More commonly the marginal land 
for any particular use itself affords a rent because, though mar- 
ginal for the given use, it is above the margin for some other 
use to which it might be applied. Rent is thus composed 
usually of a differential and of a marginal element. The former 
is an expense of production only to entrepreneurs using supe- 
rior land for the given purpose, but the latter must be paid by 
all entrepreneurs engaged in the given branch of production 
and hence figures as an element in the normal expense of pro- 
duction. 

3. In addition to the extensive margin there may be, and 
usually is, an intensive margin, that is, a use of land resulting 
from an additional investment of labour and capital on it 
which affords no rent. The intensive margin of cultivation 
is always a no-rent margin. 



The Metayer System 219 

4, Rent is measured by the method of differences starting a Surplus 
from the no-rent land margin and proceeding from grade to Ii^come 
grade until the best and most favourably situated lot for the 
purpose that is economically most important is reached. In 
the aggregate it is the surplus product due to the superiority 
of the land to which it is credited over the poorest land turned 
to industrial account at the no-rent margin. 

' 5, When best land is superabundant, as is the case in some Where 
newly discovered and sparsely settled regions, rent does not js^super" 
arise. abundant 

6. If the law of diminishing returns did not apply to land, it Law of Di- 
would not arise, as then one piece of land would serve all pur- Rg'tumT ^ 
poses for an indefinitely large population. 

7. The income yielded by permanent improvements on land Permanent 
obeys the same law as income ascribable to the land itself. ments 

8. The price of a piece of land, together with permanent im- Price of 

provements embodied in it, is calculated by capitalising its net Land Rent 

money rent at the current rate of mterest. A fallmg rate of at Current 

interest tends, therefore, to enhance the land item in the inven- J^^^® ^^ 
' . ' Interest; 

tory of a community's wealth. 

§ 128. In the foregoing explanation of rent the share of the 
return that is economically ascribable to land has been re- 
ferred to, rather than the commercial rent that is in practice 
paid to landlords. The latter is determined to some extent by 
custom and personal considerations between landlord and 
tenant and rarely corresponds exactly with the economic rent. Actual 
In case the commercial rent is less than the economic rent a j^fffgrs 
part of the return is retained by the tenant as a gratuitous ad- from 
dition to his income from the labour and capital he may have -^Qat 
invested in his business. On the other hand, if the commercial 
rent is too high the land owner gets not only what the land is 
entitled to, but also a part of the return which should go to the 
land cultivator. In either event the full economic rent is pres- 
ent as a part of the income shared between those who have an 
interest in the land either as owner or as user. 

The most familiar mode of determining commercial rent The 
without much regard to economic principles is the so-called system 
metayer system. This is the plan by which the cultivator pays 
half the produce of the year's husbandry to the land owner. 



220 



Distribution: Rent 



The 

Rent of 

Baildings 

Distinct 

from 

Ground 

Rent 



Importance 
of Rent in 
the United 
States 



who furnishes sometimes also seeds and tools, and retains only 
the other half for himself. Cultivating land " on shares " 
after this fashion has long been the custom in European coun- 
tries and is common in the Southern States of the Unitijd 
States. It has the disadvantage of not adapting itself readily 
to changing conditions which involve changes in economic 
rent, and has therefore been superseded in the more highly 
developed sections of the country by the system of money 
rents. 

In connection with the rent of land improved by the erec- 
tion of buildings upon it business men are in the habit of lump- 
ing together into one sum the rent of the land and the interest 
on the capital invested in the buildings and calling this " rent.'' 
When a distinction is made between the two, the first, or rent 
proper, is called the ground rent, and the second is called the 
rent of the building. It would be an aid to clearness if this 
mode of division were to become universal, but even in its ab- 
sence an expert appraiser can usually say with a good deal of 
accuracy how much of the gross rent for a built-over lot is due 
to the building and how much to the lot itself. Economically 
the two returns are quite distinct. 

§ 129. It would be interesting to know just what part of 
the income enjoyed by the inhabitants of a country like the 
United States is properly classified as economic rent, but un- 
fortunately no reliable information on the point is available. 
Most of the land of the country, most of its sources of water 
power, and most of its mines are operated by owners rather 
than by lessees. In consequence, calculations in regard to rent 
are largely matters of private bookkeeping, and are made with 
the carelessness which business men permit themselves when 
they come to divide their gross profits into the various items 
which economic analysis distinguishes. Any statement in re- 
gard to rents as a whole must, in the nature of the case, be but a 
rough guess, except for countries like Great Britain, where 
lands, mines, etc., are commonly operated under lease and the 
determination of rents is a matter in which two parties are 
interested. 

According to the British income tax returns, the total income 



Rent as a Source of Income in Great Britain 221 

from lands in the United Kingdom in 1897 was some $275,- Rent as a 
ocx),ooo. This did not include the income from mines, quar- income in 
ries, etc., nor ground rents. The addition of these items would Great 
increase the total to about $750,000,000, which was about 
one-tenth of the total income of the country. The total income 
ascribable to rent in the United States is probably less in pro- 
portion than the total for Great Britain. The country is newer 
and its lowest margin of cultivation is higher than the 
lowest margin for the much more densely populated mother 
country. It will perhaps be not far from the truth to esti- 
mate the rent income of the inhabitants of the United States 
at from one-fifteenth to one-twelfth the total income which they 
enjoy. The payment each year to private property owners of 
this large share of the country's income for services rendered 
not by themselves, but by their property, is a practice vigorously 
condemned by many intelligent students of economics. The 
most radical modification in the present system that has been 
proposed is that advocated by Henry George and his followers 
under the phrase " the Single Tax." The arguments for and 
against this proposal, and other plans for solving the land 
problem, are considered in the chapter on Plans of Economic 
Reform, 

REFERENCES FOR COLLATERAL READING 

•Marshall, Book VI., Chaps. IX. and X.; * Walker, "LauA and Its 
Rent; *Pierson, Principles of Economics, Part I., Chaps. II and 
III.; Nicholson, Principles of Political Economy, Book II., Chaps. 
VIII. and IX.; /. S. Mill, Principles of Political Economy, 
Book II., Chaps. VI.-IX., and XVI.; * Johnson, Rent in Modern 
Economic Theory, an Essay in Distribution; *Carver, The Dis- 
tribution of Wealth, Chap. V. 



CHAPTER XIII 



DISTRIBUTION: WAGES 



Wages 
Defined 



The 



Question 



§ 130. Wages, as the term is used in economics, include aH 
earnings assigned to men for their work, from lowest piece 
wages to highest annual salaries and " wages of manage- 
ment." From the point of view of production wages are items 
in the normal expense involved in putting goods on the mar- 
ket. From that of distribution they constitute one of the 
great shares into which a community's income of goods is 
divided. 

The problem of explaining wages is more complex than that 
of explaining rent because it has to do more directly with liv- 
ing men and women. Like the latter it involves an explana- 
tion of differences in earning power between different factors 
in production. In the United States some workers receive as 
compensation for their work not more than forty cents a day, 
while others are paid salaries of $100,000 a year and upwards. 
Such differences must be accounted for in a theory of wages. 
In the case of rent an explanation of differences in the shares 
assigned to different pieces of) land is a sufficient explanation 
of the phenomenon because these differences are measured from 
marginal land, which affords no rent.* The same is not true in 
the case of wages. Marginal workmen earn something, and 
after all differences in earnings have been explained it still re- 
mains to account for marginal or least earnings. Another 
cause of difference betv/een the two problems is that while the 
land supply of a country is relatively fixed and unalterable, its 
labour supply or its working population is constantly changing. 
The continuance year after year of high rents for certain pieces 
of land and of low rents for others, excites no surprise, but tl^ 
continuance of differences in wages seems to need special ex- 

♦The circumstances which determine the location of the margin 
of cultivation must also be explained, of course. Cf. Chapter XV. 



Unequal Capacities of Workmen 223 

planation. Why, as generation follows generation, are not all 
men moulded through an evolutionary process to one common 
type, so that differences in earning power are eliminated ? This 
is a third distinct question presented by the wages problem. 
In the following pages an explanation of the causes of differ- 
ences in wages leads up to a discussion of the reasons for the 
perpetuation of such differences. The explanation of the rate 
of pay that goes to marginal workmen is deferred to the next 
chapter. 

§ 131. Most differences in rates of wages may be explained Differences 
superficially in the same way that differences in rent were ex- wages 

plained. The demand of consumers calls for the production Due to 

r • i T- 1 , 1 • 1 • 1 Unequal 

of certam goods. Entrepreneurs, taught by the mdustnal ex- Capacities 

perience of the past, determine how the available productive °^ Work- 
factors shall be correlated for the purpose of satisfymg as far 
as possible this demand. The organisation of industry which 
results calls for workers of different capacities for different 
tasks, just as it calls for different grades of land. These 
capacities are graded according to their economic importance, 
which depends, on the one hand, upon the field there is for 
their exercise and, on the other, upon the number of men pos- 
sessing them that are available. Having in mind present 
methods of production and the present working population of 
the United States, we may distinguish the following five grades 
of workers : ( i ) men having superior capacity for planning and 
carrying out large industrial undertakings, good administra- 
tors, and talented artists and professional men; (2) men com- 
petent to succeed in smaller undertakings or to administer large 
affairs as subordinates, artists and professional men of aver- 
age ability, and highly skilled mechanics; (3) men trained for 
ordinary clerical or mechanical labour ; (4) men without special 
training, but having the requisite strength and endurance for 
manual labour ; ( 5 ) men lacking some of the mental or physical 
qualities essential to continuous labour of any kind. This 
classification is illustrative rather than exhaustive. To be 
complete it would have to recognise hundreds of different 
grades of productive capacity instead of five, and to be repeated 
for each territorial division of the country. It is intended to 
include only economic men and women, and not the unfortu- 



Differences 
Deter- 
mined in 
Same Way 
as Rents 



The 

Relation 
between 
?»i embers 
of Different 
Groups 



224 Distribution : Wages 

nate dependents who are incapable even of the humblest self- 
support. 

Just as in the land scale the area adapted by situation and 
other qualities for the most important industrial uses is exceed- 
ingly limited, so in the scale of workers the number of men 
fitted for the highest grades of labour is very small. In each 
branch of production and in each profession in every com- 
munity some one man is found at the top. Unique capacity 
may not be the only cause of the ascendency of such men, but 
unless it is present they will not be able for any length of time 
to hold their positions. Below the men of highest capacity for 
their chosen work are others of inferior ability, down to the 
marginal men in the group who find it just worth their while 
to continue to serve in their particular positions rather than to 
take up alternative employments of what we have called grade 
2. The earnings of the abler men in the group are determined 
by the comparisons that are constantly being made between 
their efficiency and that of the marginal men, who are just 
induced by their pay to stay where they are and not to turn to 
other occupations. Superior men receive the pay of the mar- 
ginal men and in addition a differential corresponding to their 
superior efficiency. 

The earnings of workers in the lower grades are measured 
in the same way as those of men in grade i. Competition act- 
ing through, and also upon, entrepreneurs, tends to assign to 
each worker above the margin in grade 5, wages made up of 
both a marginal and a differential element. The marginal ele- 
ment is what the poorest worker in the group could earn in the 
best-paid alternative employment open to him. Unless this at 
least is paid, the alternative occupation will be preferred and 
the scale will have to be readjusted. Here, as in the case of 
pieces of land, individuals without any power of substitution, 
but who are proficient in their special tasks in comparison with 
others doing the same tasks and having such a power, are as 
well off as though they had it themselves. For example, if of 
a number of college professors receiving salaries of $4000 a 
year each, some could earn as much or more in business posi- 
tions and were hesitating whether to make the change, their 
power of substitution would serve to oppose effectually an)'' 



Different Grades Overlap 225 

effort to reduce professors' salaries even though the others 
were quite unfit for any other kind of high-grade work than 
that they were doing. 

In addition to this marginal element there is a differential Tendency 
element corresponding to the superiority of each worker in his Uniformity 
grade. In practice the determination of this differential ele- of Wages 
ment in wages is a complex process except where piece-wages q^-^^q^ 
are paid, when it adjusts itself automatically. There is a tend- 
ency for whole groups of workmen, especially those organised 
in trade unions, to demand uniform wages. This policy pre- 
vents employers from hiring workers who do not come up to a 
certain standard of efficiency, but it also prevents superior 
workmen from receiving the differential wages to which they 
are economically entitled. In the occupations in which uni- 
form wages for all workmen of each grade prevail, however, 
the work is usually so simple that individual differences count 
for relatively little and the differential wages which would re- 
sult if competition were entirely free are a negligible element. 

§ 132. The above analysis implies that the world's workers The 
may be arranged in a gradually descending scale and that there Q^ades*^ 
are no breaks separating adjacent individuals and classes. It into wliich 
is assumed that men doing the same kinds of work may be ^^.q 
compared readily, so that the differential wages to which they Divided 
are entitled may be determined ; also that the marginal men in 
each employment are just held where they are by the payment 
of as high or slightly higher wages than they could earn in 
alternative employments. While this is true as a general 
picture, it must be admitted that the step from one employment 
to that next higher in the scale is often a long one. This 
is particularly the case with the step from the tasks of un- 
skilled to those of skilled workers and with that from skilled 
manual workers to brain workers. Instead of saying that there 
is one scale of workers, it would be more accurate to say that 
there are three different scales. The scale for brain workers 
begins at the highest point and breaks off not just where the 
scale for skilled manual workers begins, but somewhat lower. 
That is to say, the compensation of brain workers of the lower 
grades is no greater than that of manual workers of the higher 
grades. In the same way the scale for unskilled workmen, 



226 



Distribution : Wages 



In Practice 
the 

Number of 
Grades of 
Workmen 
is Very 
Large 



which begins low down, runs parallel to the scale for skilled 
workmen of the lower grades for a time and then continues to 
the lowest margin. Unskilled workmen of the higher grades 
earn as high wages as skilled workmen of the lower grades. It 
follows that the alternatives open to brain workers towards the 
lower end of the scale are a lower grade of brain work or a 
comparatively high grade of skilled labour, and those open to 
skilled workmen of low grade are still inferior skilled or com- 
paratively high-grade unskilled labour. 

Another qualification that should be added to the analysis of 
the preceding section refers to the assumption that the least 
efficient or marginal workers in each group have alternative 
occupations which maintain the level of their earnings. This 
is usually but not always true. Just as it frequently happens 
that men who are superior in their given branch are competent 
to do nothing else, so it sometimes happens that men competent 
to do nothing- else are at the very margin of efficiency for the 
work they perform. The earnings of such marginal men are 
fixed by a comparison of their work with that of abler men in 
the same branch of production to whom alternative branches 
are open. The options of the latter fix the return for that class 
of services to all the workers in their group. In extreme cases, 
as, for example, in the sweating industries, it sometimes hap- 
pens that a group of workers competent to do all of the work of 
a given sort for which there is a demand are competent to do 
only that kind of work. Under such circumstances competition 
within the group may reduce wages to a starvation level and 
keep them there until the demand for the product increases, 
the number in the group is reduced, or alternative occupations 
are opened to some or all of the individuals affected. 

§ 133. The assumption that the working population of a 
country like the United States is divided up into a few groups 
is helpful, but as already intimated the actual number of groups 
is legion. In recapitulating the explanation of differences in 
wages it will be well to think of the labour market with all of 
its complexities. On one side, then, is the scale of tasks to be 
performed, determined in part by the demand of consumers for 
goods and in part by the organisation of the productive factors 
adopted after generations of industrial experiment. On the 



Marginal and Higher Wages 227 

other is the working population divided up into hundreds of 
different groups corresponding to the diverse tasks to be per- 
formed. The wages paid to those performing the tasks 
highest in the economic scale are high. They must be so to 
keep such men from other tasks they might undertake and 
also to induce them to serve one employer rather than another 
in their particular tasks. The former possibility fixes a mar- 
ginal wage which all men performing the given sort of work 
must receive. Competition among employers adds to this mar- 
ginal wage a differential element measuring roughly the 
superiority of the better men over those who are just good 
enough to be retained in their positions. As the scale descends 
from group to group similar relations are found to prevail at 
every point. Each man's wages contain a marginal element 
determined by his own power of substitution or by that of some 
other worker in the same group. If he is superior to the mar- 
ginal men of his group his wages will be higher by a differen- 
tial element roughly gauging his superiority. If inferior, as 
sometimes happens, his differential will be in the form of a 
deduction from the wages which more capable men doing the 
same sort of work and with the power of substitution 
receive. 

At the lower end of the scale marginal wages will be received X^f Causal 
, . , , - , , ,..,., . , Relation 

which are not determmed by what is paid m alternative employ- between 

ments because there are none, or at least none in which workers Marginal 

' and Higher 

are actually employed. From these lowest wages, which are Wages 

still to be accounted for, all higher wages are at last analysis 
measured. They are a minimum to which the differential in 
the lowest group is added to determine the marginal earnings 
enjoyed in the next higher group. To this another differen- 
tial is added in the next higher group to determine the next 
higher margin, which figures in turn with another differential 
in determining a third margin. Thus by successive steps, like 
a flight of stairs broken by frequent landings, the highest 
earnings of all are finally attained. Although measured from 
the lowest margin, the wages paid at the top of the scale can- 
not be said to be determined by those paid at the bottom. In 
a progressive community it would be more accurate to say that 
the wages paid at the bottom are determined by what is paid at 



The Rate 
of Wages 
Dependb 
on Demand, 
and Supply 
for 

Workmen 
of Each 
Given 
Grade 



Differences 
in Wages 
Perpetu- 
ated by the 
Immobility 
of Labour 



228 Distribution : Wages 

the top. The tendency is upward rather than downward. Men 
are being drawn up from group to group and the lowest mar- 
gin is itself rising. The important point at this stage of the 
explanation of wages, however, is to perceive clearly the con- 
nection between the rates paid for different kinds of work 
rather than to understand their ultimate causes. 

In conclusion it should be emphasised that the earning power 
of each worker depends on two circumstances neither one of 
which should be lost sight of in a discussion of wages. These 
are the appreciation in which the goods he helps to produce are 
held by consumers and the number of workers competent to 
engage in such production as his competitors. Rare combina- 
tions of industrial qualities command high wages if the goods 
that may be produced through them are in demand, but other- 
wise not. Even rather common combinations of qualities may 
command high wages if the field for their exercise is large. 
The highest earnings go to those who have unusual qualities 
for which there is great demand. On the other hand, the 
lowest go to men who have only ordinary abilities of a sort for 
which the demand is limited. Great administrators, like rail- 
road presidents, get high salaries because there are many posi- 
tions to be filled and few men competent to fill them. Sewing 
women, on the other hand, earn very little because there is little 
work for them to do in comparison with the number ready to 
do it. In neitlier case is the difficulty or ease of the work to 
be done the chief influence determining the pay which it com- 
mands. A multiplication of the men competent to be good 
railroad presidents would serve to reduce the salaries attached 
to such positions, even though there was not the least change 
in the nature of the work required. In the same way, a reduc- 
tion in the number of sewing women would serve to increase 
the earnings of those who remained, although they worked no 
longer or better than formerly. 

§ 134. Competition tends to bring the wages of workers hav- 
ing the same industrial qualities to a level within each labour 
market, just as it serves to cause identical goods within a goods 
market to sell for the same prices. A labour market is, how- 
ever, more restricted tlian a goods market. As Adam Smith 
long ago remarked, '' a man is of all sorts of luggage the most 



The Immobility of Labour 229 

difficult to be transported." The free movement of workers 
from positions where they are ill paid to positions where they 
are better paid, which is essential to free competition, is con- 
fined within narrow territorial limits. Ties of love, family asso- 
ciations, habit, or sheer inertia hold most men to the localities 
in which they were born despite the allurements of higher earn- 
ings in other places. There is, to be sure, a type of man to 
whom the attractiveness of new experiences in new surround- 
ings is even greater than that of home, and in countries in 
which this type is common competition between workers is 
active over a wide area, with less wide differences in the 
rates of wages paid to workers of the same efficiency in 
different regions as its result. But even in the United States, 
where, according to the census returns, some twenty-five 
per cent, of the people live in other States than those in 
which they were born, this type is rare, especially among 
workmen of the lower grades, and differences in wages be- 
tween different sections persist for many years. These dif- 
ferences would doubtless disappear in a few generations if new 
regions were not constantly being opened up and if new 
methods of production calling for a dift'erent distribution of the 
working population were not constantly being introduced. 
But so long as these changes occur on any considerable scale 
differences in wages may be expected to continue. Improve- 
ments in means of transporting workers and their belongings 
and of transmitting intelligence tend to widen the labour 
market and may in time make it as wide as the whole country. 
There seems little likelihood, however, that the barriers that 
now oppose the free movement of population between different 
countries, and by so doing perpetuate differences in rates of 
wages between nations, will be overcome for many centuries. 
• Economists describe the unwillingness of workmen to seek the 
market which promises the highest wages as the immobility of 
labour. This immobility must always be kept in mind as a 
chief circumstance preventing that distribution of the labour 
force of each country, and even more of the v/hole world, which 
would yield the largest productive results. From the point of 
viev/ of distribution it causes some labour markets to be over- 
supplied relatively with the different grades of workers for 



230 Distribution: Wages 

which there is a demand and forces such workers to content 
themselves with proportionately lower wages. 

§ 135. In judging of the extent of differences in the rates 
of wages paid in different localities care must be taken to com- 
pare workers of equal degrees of efficiency. From the point of 
view of the entrepreneur it is not the time or effort of the 
worker for which wages are paid, but the work done. He is 
interested not in the wages per hour, or per day, or per week 
of his employees, but in the cost per unit of what they accom- 
plish. If of two workmen labouring side by side one accom- 
plishes in a given time twice as much as the other, his wages 
should be twice as high to make the cost of his labour to his 
employer the same as the cost to him of the labour of the other 
workmen. Free competition in the labour market tends to 
equalise the cost of labour or eiUciency-wages, but not Hme- 
wages, except for workmen who are equally efficient. The 
industrial world presents many examples of differences in 
wages paid for the same kind of work due to differences in 
the efficiency of the workmen. Thus farmhands in the North- 
ern States receive two or three times as high wages as farm- 
hands in the cotton fields of the South, partly because they 
work harder and get more done in the same period of time. 
In the same way, the differences between the wages paid to 
American mechanics and those paid to similar mechanics on 
the continent of Europe is due in part to the greater efficiency 
of, American workmen. In comparing Western countries with 
Eastern countries the importance of efficiency in determining 
wages must not be lost sight of. The very low earnings of the 
Indian coolie are due in part to a very low standard of effi- 
ciency in comparison with that of the workers of the white 
race. Even if the congestion of population in India could be 
relieved the low industrial efficiency of the people would re- 
main a cause of relatively low wages. 

§ 136. The statement that competition tends to make the 
earnings of workers of equal efficiency the same in any one 
labour market is only roughly accurate. Men do not consider 
the money return which an occupation promises merely, but all 
of the advantages and disadvantages connected with it. The 
principal other considerations which offset and consequently 



Allowance for Dangers Incurred 231 

fjelp to perpetuate differences in money wages are the fol- 
lowing : 

(i) It is not money wages, but real wages, that are com- Differences 
pared, and the latter vary with the expensiveness of Hving in ^^ Lh^in^ 
different locahties. In country districts the goods which wage- 
earners of the lower grades consume are cheaper than they are 
in cities. Rents are lower, food costs less, and clothing though 
dearer really costs less because less is required. Hence low 
money wages in the country may stand for the same real wages 
as high money wages in the city. An equally favourable com- 
parison may be made between the cost of living in a warm and 
in a cold climate. In the former houses need less to be heated, 
fewer clothes and less food suffice, and the number of free 
goods is larger. These are other circumstances tending to keep 
money wages lower throughout the Southern States in the 
United States than they are in the North. 

(2) Some occupations require longer apprenticeship and Differences 
more expensive training than others. In comparing different Mastering 
occupations men normally take account of the time and capital Differeut 
that must be invested in preparatory training, and unless the 
earnings in the industry requiring special preparation promise 

to be large enough to repay them for the investment, they will 
not make it. In practice capital invested in training affords a 
very high return because so many of those who might benefit 
most from training are too poor to obtain it. 

(3) Occupations differ in the ease or difficulty of the work Differeac^js 

in .Plq'V&G" 

required. The harder and more disagreeable the work the ableness o£ 
higher must the wages be to attract men from easier tasks. Different 
This does not mean that those who do the most disagreeable tions 
work are always the ones who are most highly paid. It often 
happens that men who do such work have not the option of 
doing something easier, and when this is the case their earn- 
ings may be very low. Whenever they have such an option, 
however, the wages paid for the most arduous toil must fully 
make up for the difference or it will fail to attract its quota of 
workers. 

(4) Some positions are more dangerous than others and Allowance 
must offer a premium to cover life and accident insurance, in Danger?; 
addition to mere wages, to attract workmen from safer trades, incurred 



Allowance 
for 

Chances 
of Success 



Social 
Esteem 
a Factor 



Also 

Regxilarity 
of Em- 
ployment 



Finally 
Chances of 
Promotion 
Considered 



Competi- 
tion Would 
Make 

Advantages 
of Different 
Employ- 
ments 
Equal if 
Men were 
Exactly 
iVlike, but 
They are 
Not 



232 Distribution : Wages 

(5) The chance of success and the rewards of success are 
different in different occupations. In the professions, espe- 
cially, " nothing succeeds like success." The more clients or 
patients a man has the more eagerly he is sought by additional 
clients and patients. It results from this that successful pro- 
fessional men are as a rule successful even beyond their deserts. 
The hope of similarly large incomes attract into professional 
callings more men than the businesses require. This reduces 
the average earnings in these occupations. In the United States 
professional men undoubtedly receive smaller average incomes 
than do men of equal ability and training engaged in commer- 
cial enterprises, and partly for the reason just given. 

(6) Some positions are held in high esteem and offer social 
advantages to compensate for lower earnings. This is true 
usually of professional work and serves, like the previous in- 
fluence, to depress the money earnings of professional men. 

(7) The regularity of employment must always be con- 
sidered. Trades like those connected with building, which 
give employment only part of the year, must, to equalise ad- 
vantages, offer higher day wages than those which occupy men 
continuously. 

(8) The chance of advancement and promotion must also 
be taken into account. Employments which lead to nothing 
should afford better pay than those having educational value 
and serving as steps in a gradual ascent to higher positions. 

These and other similar considerations will readily be ac- 
cepted as reasons for differences in wages that are independ- 
ent of differences in men. Taken together they come so near 
to explaining all differences in wages that some writers have 
assumed that but for them competition would in time bring 
the money wages of all grades of workmen to one uniform 
rate. This would certainly be true if competition were per- 
fectly free and equal, that is, if all men were sufficiently alike 
to turn readily to the occupations that offered the largest re- 
turns. Under such circumstances the working population 
would move away from industries which paid low wages and 
towards industries which paid high wages, until the increased 
labour supply in the former reduced earnings and the dimin- 
ished supply in the latter advanced them to the uniform rate. 



Influence of Habit, Custom, and Education 233 

But, as we have seen, men are not alike in their industrial qual- 
ities. We must now inquire why the progress of evolution 
does not make them alike by gradually eliminating all but those 
of the highest industrial type. 

§ 137. The qualities that fit men for the performance of dif- The 
ferent industrial tasks are partly inherited and partly acquired ^f fl^^°^^*. 
by education. In regard to the laws of heredity we still know Inde- 
very little. Although children generally display some of the ^^^"^^"^^^ 
characteristics of their parents or grandparents, they do so in 
such an irregular and seemingly haphazard way that it is al- 
ways doubtful what traits any particular child is going to de- 
velop. Remarkable men and women have frequently, if not 
usually, rather commonplace children, while it is often 
impossible to say from which parents they themselves received 
their remarkable qualities. Until the laws of heredity are more 
perfectly understood it must remain doubtful whether heredi- 
tary differences tend to disappear. Extreme eccentricities 
which prevent the individuals displaying them from maintain- 
ing themselves and rearing families of average size are of 
course eliminated by the process of evolution; but within the 
limits permitted by the necessity of swrvival differences in 
capacity seem to be transmitted generation after generation 
without appreciable check. 

If heredity were the only factor in determining character and The 
capacity the adjustment of the supply of workers of different ^ H^biT 
grades to the demand for them would be largely outside of Custom, 
society's control. But most students agree that education, EducatioB 
which includes all of the formative influences acting upon hu- 
man beings from without as they pass through life, is an equally 
important force. Adam Smith went so far as to say that " the 
difference between the most dissimilar characters, between a 
philosopher and a common street-porter, for example, seems to 
arise not so much from nature as from habit, custom, and edu- 
cation." A similar view was expressed recently by a Chicago 
judge who had had much experience in dealing with youthful 
criminals. When asked if he thought that his own children 
would have been criminals if they had been brought up in 
criminal surroundings he replied : " I don't think so, I know 
it." Except as regards abnormalities both in the direction of 



234 



Distribution : Wages 



Differences 
in 

Standards 
of Living 
Perpetuate 
Differences 
in Wages 



Edncation- 
al Oppor- 
tunities 
Enjoyed 
bv 

Children 
in First 
Grade 



genius and imbecility the view that " habit, custom, and educa- 
tion " have at least as much to do with differences in men as 
" nature " seems to be justified by observation. In any case it 
is chiefly through education that men act in their efforts to fit 
their children for industrial life. 

§ 138. Education being such an important influence in 
moulding industrial capacity, a partial explanation of differ- 
ences in capacity must be sought in differences in the educa- 
tional opportunities that are offered to the children of different 
families. Notwithstanding the self-sacrificing devotion of 
nearly all parents to the interests of their children, and not- 
withstanding improvements in free public educational in- 
stitutions, such differences are still great, even in the United 
States. Their perpetuation is due in large measure to 
the different standards of living which control the conduct 
of different industrial classes. By the standard of living 
is meant the mode of activity and scale of comfort which 
a person has come to regard as indispensable to his 
happiness and to secure and retain which he is willing to 
make any reasonable sacrifice, such as working longer, or post- 
poning marriage. It is evident that different individuals and 
different classes have very different standards of living and also 
that the self-restraint that the standard imposes upon some 
is greater than that it imposes upon others. Standards of 
living are nearly if not quite as numerous in a country like the 
United States as degrees of industrial capacity. To simplify 
the discussion we may divide the working population of the 
United States into the same five grades distinguished in a pre- 
vious section and consider how the different standards of liv- 
ing of these different grades of workers affect the educational 
opportunities which children born into them enjoy. 

To the first economic class belong people with incomes from 
property or from professional or business activity exceeding 
$3000 a year for each family. They are of two distinct types : 
those who have the saving instinct highly developed and those 
who combine with a fair degree of prudence good professional 
or business ability. In this class are included the great army 
of successful entrepreneurs and the holders of all of the more 
important salaried positions. Its members have as a whole 



Children of the Upper Class 235 

¥ery definite and persistent standards of living and although 
some of them through speculation, dissipation, or other cause, 
lapse into a lower class, the vast majority not only retain their 
positions, but provide for their children educational advan- 
tages and business openings which insure the latter's reten- 
tion of the same or higher standards through life. The 
superior educational opportunities which children of this 
highest class enjoy in comparison with those belonging to lower 
classes begin at birth and continue to help them even after they 
are independently established. They have the constant care of 
loving and intelligent mothers and the best medical attendance 
through the trying illnesses of infancy. They are less apt to 
be forced in their development and more certain to be supplied 
regularly with nourishing food, pure air, and the other requi- 
sites to healthful growth. During the school period the supe- 
rior opportunities of these fortunate children multiply rather 
than diminish. A large proportion of them do not go to the 
public schools, but receive instruction in less crowded private 
schools or from governesses or tutors at home. Moreover, their 
education is not interrupted, as is so often the case with children 
belonging to the lower classes, at the age of fourteen or fifteen. 
Being under no pressure to support themselves or to contribute 
to the family income, they may go through the high school or 
prepare for college, take a college course, and subsequently 
some professional or technical course, if they have a bent in 
either of these directions. As a result of these superior educa- 
tional advantages children of this class are early fitted for 
the higher grades of work. Family influence insures them 
favourable openings as soon as they are ready for them, and the 
same influence often facilitates their advancement. Through all 
the years of preparation children of this most favoured class 
associate together and see little of children from other ranks 
of life. Unconsciously they come to accept the standard of 
living of their set as the only possible one. From every side 
they are impressed with the importance of a good income as a 
condition to happiness and with the advantages of property. 
Though some of them may show a tendency to recklessness 
when released from the restraints of school life, most of them 
have learned prudence without ever having tasted the fruits of 



236 



Distribution 



Wages 



Children 
of the 
Middle 
Cla^ 



improvidence. They know that a certain income is indispen- 
sable to what they consider decent single existence and that a 
somewhat larger income must be assured before marriage is to 
be thought of. Young men mindful of the expenditures of 
their girl friends are restrained by a sense of chivalry from 
proposing marriage until they can provide advantages at least 
equal to those enjoyed at home. On their side young women 
in the group have definite ideas in regard to the cost of main- 
taining a household and are quite as prudent in their attitude 
towards matrimony. In consequence rash matches among 
young people of this class are few, and young men are usually 
well established before they incur the responsibility of provid- 
ing for a family. This postponement of marriage results in a 
low birth-rate for the class as a whole, which, by lessening the 
number trained for the higher professional and industrial posi- 
tions, helps to maintain the earnings which holders of such 
positions are able to command. 

The second economic group consists of the great army em- 
braced in America's " middle class." Although possessed of 
some property the members of this group rely chiefly upon 
their own exertions for their incomes, which range from $1500 
to $3CXDO a year for each family. The different types found in 
this class include independent business men operating on a 
small scale, salaried managers, overseers, school-teachers, 
bookkeepers, clerks, etc., and skilled wage-earners command- 
ing the year through upwards of five dollars a day. Like the 
members of the higher class they have definite standards of 
giving, but these standards are lower. They know from ex- 
perience that happiness is attainable on the smaller incomes 
that they are able to command, and their ambitions are usually 
limited to seeing their children equally well established in life. 
Unaccustomed to funded incomes they are little apt to acquire 
any considerable amount of property. The educational oppor- 
tunities afforded children of this class are inferior in many re- 
spects to those of children of the wealthy. Although as well 
cared for during the period of infancy, they are sent too early 
to the public schools. Here the underpaid and overworked 
teachers do what they can for their large classes, but the very 
conditions of the system prevent that individual attention ta 



Standards of Living Not Rigid 237 

the special needs and aptitudes of pupils that is so important to 
the development of capacity. Education of this sort means 
shaping all to one common mould, and if it does not always re- 
sult in mediocrity it is because its tendencies are counteracted 
by home and other influences. In the common schools, more- 
over, children of the second group come in contact less with 
children of well-to-do parents than with those whose surround- 
ings are even humbler than their own. Instead of becoming 
acquainted with higher standards of living they are confirmed 
in their impression that their own are the best. 

Either from necessity, or because they undervalue the train- Their 
ing offered by high schools and colleges, parents in this second Occupa- 
class usually withdraw their children from school at the age of ^i^ns 
sixteen or seventeen. Boys are now ready to begin earning 
something and the choice of an occupation has to be made. At 
this critical period the lack of broad acquaintance with business 
opportunities and of business influence on the part of parents 
tells heavily against their sons. With their limited horizons 
parents of this class are too apt to choose openings where earn- 
ings begin at once rather than those calling for a prolonged 
period of apprenticeship. As a rule they shrink from risks, pre- 
ferring modest security to the uncertain prospect of large 
achievements. This attitude leads them to select for their sons 
salaried positions, necessarily near the bottom, calling for the 
performance of routine tasks which have little educational 
value, and from which they have little chance of rising to the 
higher positions of trust and responsibility to which the larger 
salaries are attached. Thus at the age when children of the 
higher class are leaving colleges and technical and professional 
schools, or have made considerable progress towards master- 
ing the details of complex businesses, those of the middle class 
have already lost the precious years when they might have 
been fitted for something superior to the positions in which 
their fathers are growing old. Like their fathers they marry 
early and rear families to the standards of living that they have 
made their own. 

In a progressive country like the United States many excep- Standards 
tions must be made to the above description. Standards of Not Ri^ 
living are flexible and boys of exceptional ability frequently 



238 



Distribution 



Wages 



Children 
in the 
Third 

Grade 



The 

Fourth 
Grade 



rise from very humble beginnings to the highest posts in the 
business world. These exceptional careers are more interest- 
ing and naturally attract more attention than those which are 
more usual and typical, but they should not be allowed to ob- 
scure the fact that children in the two classes described enjoy 
unequal advantages and that the great majority must be satis- 
fied to hold their ov/n in the class to which they were born. 
For one man who breaks with the standards of his class and 
rises to a higher standard there are a hundred who follow in 
their parents' footsteps. This does not mean necessarily that 
the standard of living of each class is fixed and rigid. The 
whole group may be moving up or falling back together. It 
means simply that differences in standards of living and the 
conduct that results from them are largely responsible for the 
perpetuation, generation after generation, of the striking dif- 
ferences in wages that have been described. 

The third class embraces skilled workers, both hard and soft 
handed, who depend largely on their wages, low salaries, or 
the produce of their farms for their maintenance and whose 
yearly incomes range from $600 to $1500 to the family. Its 
members are as a rule sober and industrious. They are inter- 
ested in their work and it is sufficiently individual to permit 
them to take pride in its accomplishment. At the same time 
the range of their ambitions is narrow and their standards of 
living make them satisfied with the incomes they receive. In 
comparison with members of the next higher class they tend to 
marry somewhat earlier, to have somewhat larger families in 
proportion to their means, to withdraw their children from 
school somewhat sooner, and to be somewhat less mindful of 
the latter's ultimate advantage in choosing occupations for 
them. The way in which these tendencies react upon the indi- 
vidual capacities of members of this group and prevent any 
considerable number of them from becoming competitors for 
the positions open to the higher classes has been sufficiently 
suggested in what was said of Group 2. 

To the fourth economic group belongs the numerically large 
class of unskilled workmen. Their earnings vary somewhat at 
different seasons, but may be put at from one to two dollars a 
day for the North Atlantic States. The tasks which unskilled 



The Fourth Grade 239 

■workmen perform depend mainly upon physical strength and 
endurance and are easily mastered. Their hours are long and 
their labour exhausting, and in consequence their lives afford 
little opportunity for attention to other than the merely physi- 
cal wants. Early marriages are facilitated by the fact that the 
full earning power of men of this class is attained at nineteen 
or twenty, and that their standard of living opposes no barrier 
so long as work is steady and wages are certain. Children 
come in this class before the parents have themselves reached 
maturity, and their number, and the rude way in which the 
family is compelled to live, prevent the mother from giving 
them the attention that their best interests demand. As these 
children approach the age when they can go to school they are 
allowed to spend more and more time on the streets and to ac- 
quire that precocious knowledge so destructive of the idealism 
natural to childhood. In school their progress is retarded by the 
lack of that stimulus and encouragement on the side of parents 
that is so helpful to children reared in more fortunate circum- 
stances, and just as they are getting old enough to form judg- 
ments for themselves their help is needed at home, or jobs are 
secured for them, and the formal part of their education is 
brought to an abrupt close. Made bread-winners thus early in 
life, they are apt before they are twenty to find the restraints 
of home irksome, and to resolve to create homes for themselves 
as soon as their earnings come up to the low standard to which 
they are accustomed. Acting on such resolutions they follow 
in the footsteps of their parents, as their children are likely to 
follow in their footsteps. Thus for unskilled workmen, as for 
the three higher classes considered, the standard of living and 
the conduct which it imposes effectually bar any but the excep- 
tionally gifted or exceptionally fortunate from training them- 
selves to do work of higher grade. Their competition for 
employment is limited to that grade of work to which they 
were born, and though some in each generation break the bonds 
that hold them down and pass from their group to the one just 
above it, the number is too small to close entirely the gulf that 
divides the earnings of representative members of the two 
grades. 

The fifth and last class into which industrial society has been 



240 Distribution : Wages 

The divided includes those unfortunates whose average earnings to 

Grade the family are less than one dollar a day. This is the class 

sometimes spoken of as the " submerged tenth." Its members 
are without definite standards of living, never having acquired 
any or having been compelled to give them up. They are pre- 
vented by some moral, mental, or physical disability from get- 
ting on in the world, and unless that disability can be removed 
and they can be won back to one of the four classes that have 
been described, they must inevitably sink to the level of social 
dependents. Every community has some representatives of 
this class and recognises its uplifting as a social duty. As the 
result of the efforts that are being put forth and of the high 
death-rate to which the class is subject, its members are con- 
stantly changing. Little can be said of it pertinent to this dis- 
cussion except that those who descend to it from above are 
more numerous than those who rise out of it. Dependency 
and death are the goals to which most of its members are drift- 
ing, and the only hope of betterment lies in the gradual elimi- 
nation of those circumstances which cause this class to be re- 
cruited year after year from the higher classes. 

Non- . § 139- The conclusion of this review of the habits and stand- 

competmg: .^..^ . , ., ,.,., 

Groups ards of different groups of workers is that the mdustnal 

population is divided up into a number of classes among 
whose members competition is so fitful and irregular that we 
may without serious error follow Professor Cairnes, the Eng- 
lish economist, in styling them " non-competing groups." 
Partly because the hereditary qualities required are rare, but 
even more because few besides those born into the highest eco- 
nomic class who have these qualities can obtain the educational 
advantages necessary for their development, the number of in- 
dividuals competent to fill the higher executive, professional, 
and artistic positions is exceedingly limited in comparison with 
the demand for them. The earnings of men in these positions 
remain therefore many times higher than those received in in- 
ferior posts. Similar limitations on the power to compete per- 
petuate the higher earnings of each successive grade of 
workers in comparison with those in the next lower class, and 
together they make the phenomenon of one man receiving 
$100,000 a year for his services and another receiving no more 



Need of Free Public Schools 241 

than $100 so common, even in a country where there are no 
restrictions on labour and where the common schools are free ■ : < ■• 
to all, that it scarcely excites comment or seems to require 
explanation. 

But, it may be asked, if education is so important a cause of Reasons 
the differences in the earning powers of diif erent men, and if Failure t& 
acquiring education is simply one way of investing capital for a Invest 
future return, how does it come about that more capital is not Capita! iu 
invested in this way? The answer is simple. Those to whom Educaiiou 
the education would be invaluable are too young or too igno- 
rant to appreciate the fact or are without the capital to invest. 
Their parents are also without capital and have, moreover, a 
less direct personal interest in the result. Men with capital, on 
the other hand, do not invest it in the education of other 
people's children, except as a charity, because there is no form 
of contract under which they could claim a part of the 
return. 

Those needing education cannot, as minors, legally contract, 
nor can their parents bind them, except within certain limits, 
during the period of their minority. It follov/s that for all but 
the children of the wealthy such education as is enjoyed must 
be public and free. For the community as a whole, the invest- 
ment of capital in educational opportunities tending to add to 
the industrial capacity of boys and girls is a certain means of 
adding to the collective wealth. Capital so used, especially to 
inculcate higher standards of living and efficiency among chil- 
dren of the poor, yields a princely return and will continue to 
do so until the present inequalities disappear. It is therefore 
to the community, and to improvements in the free schools, 
free colleges, and free universities that we must look for 
the removal of the disadvantages under which children of the 
lower classes now labour. To remove them completely it will 
be necessary not only to improve schools, colleges, and univer- 
sities covering all branches of technical and professional train- 
ing, but to raise the standards of parents so that they shall be • • 
eager to have their children enjoy the best advantages and to 
provide in some way for the maintenance of children whose 
parents cannot afford to support them during their years of 
5tudy and preparation. The mere mention of these needs re- 



242 Distribution : Wages 

enforces what has been said of the present lack of equal edu- 
cational opportunities. 
Cc«clasioii Summing up the results of this long analysis, we must con- 
clude that the industrial population consists of non-competing 
groups of workers whose differences in fortune and in stand- 
ards of living are reflected in unequal educational opportuni- 
ties which serve to perpetuate, generation after generation, tlie 
differences in wages explained in previous sections. The 
picture drawn appears somewhat exaggerated for the United 
States at the present time, because the country is comparatively 
new and uadeveloped. The exploitation of natural resources 
still offers a wide field for the adventurous and prevents, while 
it continues, that rigid stratification into economic classes that 
is found in the older countries of the world. But such a strati- 
fication already appears in the United States and it will show 
itself more and more clearly as the natural resources of the 
country come more completely under private ownership, unless 
the tendency in this direction is successfully opposed by a broad 
and vigorous social policy. In spite of it there are even in the 
older countries referred to many individual exceptions to the 
rule that children remain in the economic class to which they 
were born. Persons of great native ability rise to positions 
suited to their capacities despite all obstacles. On the other 
hand, all advantages seem vv^asted on other persons who from 
innate stupidity or perverseness are incapable of deriving bene- 
fit from them. These exceptions are of much more signi- 
ficance to the moralist than the more commonplace careers that 
have alone received attention in the preceding analysis. They 
justify the familiar assertion that each one's success in lii'e 
depends mainly upon himself, but they do not alter the more 
fundamental truth that the sort of self one is depends upon 
heredity and education and that differences in educationaJ 
opportunities are a chief cause of the differences in wages 
which it is the task of economics to explain. 
The Deter- § 140. The causes of differences in rates of wages and of 
Marginal*' their persistence, generation after generation, have been ex- 
Wages plained in the preceding sections and it remains now to ac- 
count for the earnings that are enjoyed by marginal workmen, 
which are tlie minimum from which all higher earnings are 



Marginal Wages 243 

measured. The thesis that we have proposed to defend is that 
tinder conditions of free, all-sided competition the earnings of 
marginal, as of other, workmen will correspond accurately to 
the contributions which they make to production. To gauge 
this contribution we must pass now to the discussion of inter- 
est, the last share in distribution. The different factors in pro- 
duction co-operate in all productive processes. The product is 
a joint-product and we can determine the share of it that is 
economically ascribable to each factor only after we have 
clearly perceived the basis on which the claim of each factor 
rests. In the next chapter we have to explain interest and dif- 
erences in rates of interest by an analysis similar to that we 
have applied to profits, rent, and wages, and then to consider 
how the comparisons are made by which the proportionate 
share of each factor is determined. 

REFERENCES FOR COLLATERAL READING 

*MarshaU, Principles of Economics, Book VI., Chaps. III.-V. ; *Clark, 
Distribution of Wealth, Chaps. VII. and VIII. and XI.-XIV.; *Taus- 
sig. Wages and Capital, Part I.; Walker, The Wages Question ; 
Schoenhof, The Economy of High Wages. Part I.; * Pier son. Princi- 
ples of Economics, Part I., Chap. VI.; Davidson, The Bargain 
Theory of Wages; Thompson, The Theory of Wages and Its Ap- 
plication ; *Adam Smith, Wealth of Nations; Book I., Chap. VIII. 
and Chap. X. Part \.;* Fetter, Principles of Economics, Chap. 23; 
*Carver, The Distribution of Wealth, Chap. IV. 



CHAPTER XIV 



DISTRIBUTION: INTEREST 



Interest 
Defined 



Interest, 
Rent, and 
Wages 



Di'fferences 
in Rates 
of Interest 



The 

Mobility 
of Capital 
Depends 
upon the 
Replace- 
ment Fund 



§ 141. Interest has already been defined as what is paid for 
the use of capital. From the point of view of distribution it 
is the share of income that is assigned to capital goods, or more 
properly to the owners of such goods, for the part the latter 
play in production. 

In one of its aspects interest resembles rent. Like the lat- 
ter it is a share of income assigned to material aids to pro- 
duction. Unlike rent, however, it is not paid for the use of un- 
producible gifts of nature, but for products of human industry. 
As explained in Chapter VII. the creation of capital goods in- 
volves, in addition to the factors that co-operate in all pro- 
duction, saving, abstinence, and waiting. Capitalists contribute 
to production in these ways just as truly as do workmen 
through their efforts. In this aspect interest more closely 
resembles wages. Both reward men for services they render 
in connection with production. 

In the explanation of interest it will be convenient to begin 
by showing why different rates of interest are paid for the use 
of the same amounts of capital, just as we began the explana- 
tion of wages by discussing causes of differences in wages. The 
causes determining marginal interest and the relation in which 
it stands to wages will then be considered. 

§ 142. Before attempting to explain the causes of dif- 
ferences in rates of interest it will be well to make clear the 
forces which tend to equalise the earnings of all kinds of capi- 
tal goods in competitive industries. The almost infinite variety 
of capital goods and the diversity of the services they render in 
production were considered in Section 74, Chapter VII. Some 
capital goods are fairly mobile and may be assigned readily to 
the particular branch of production in which they are in great- 
est demand. Most of them, however, are more or less 

244 



The Mobility of Capital 245 

specialised and seem to lack the plasticity necessary to free 
movement and free competition. This is the situation as it 
presents itself to the observer taking an instantaneous photo- 
graph of capitalistic production. But instantaneous photo- 
graphs of shifting, changing objects are seldom very lifelike, 
because they fail to represent the movement which is their 
essential characteristic. To be understood, capitalistic pro- 
duction must be studied not as it appears at any particular 
moment, but as it appears over a considerable period of time. 
It is not an instantaneous photograph, but a " moving picture," 
or a series of successive impressions that is required. Every 
capital good has its distinct life history. By itself it has little 
mobility, but, through the fact that it comes into being, wears 
out and is replaced, it allows great mobility to the capital tran- 
siently embodied in it. No capital good is ever called into 
being unless the investor or entrepreneur responsible for its 
creation believes that it will earn not only the current rate of 
interest on the sum invested in it until it is worn out, but in 
addition a fund for its own replacement. In the bookkeeping 
of the industrial world a part of the earnings of capital goods 
is regularly set aside to replace those goods. Circulating capi- 
tal destroyed in a single use must completely replace itself as 
well as earn interest in that use. Fixed capital which may be 
used for some tim.e has a longer period in which to replace it- 
self, but in connection with it too the process of replacement is 
in constant operation. The constantly accruing replacement 
fund which flows back to investors and entrepreneurs is com- 
pletely mobile. It appears as a certain amount of free purchas- 
ing power which may be used either to replace the capital goods 
in process of destruction with exactly similar goods, or to call 
into being quite different capital goods, as the judgment of the 
entrepreneur may determine. At any given moment the 
amount of this mobile replacement fund is small. In order 
that delay and loss may be avoided, its destination must be de- 
cided upon even before it arises, and in consequence it sel- 
dom accumulates in the hands of investors and entrepreneurs, 
but merely flows through their hands on its way to embodiment 
in new forms of capital goods. Nevertheless the existence of 
this constant flow of mobile purchasing power serves, over con- 



246 Distribution : Interest 

siderable periods of time, to give great mobility to capital as a 
whole. Through its agency the limited fund of capital may be 
embodied at each period in just those forms of capital goods 
which industrial society most requires. If inventions are being 
made, the approved appliances may gradually be substituted 
for those which are old-fashioned and out of date. If popula- 
tion is increasing rapidly, for costly machines requiring few 
workmen may be substituted more numerous and cheaper 
machines requiring more workmen, and if the substitution is 
made slowly the loss resulting may be inappreciable. On the 
other hand, if the population is stationary and the capital fund 
is itself growing, the place of the hand imiplements, which 
were previously the forms of capital goods most needed, may 
gradually be taken by machines which can be operated by iewer 
workmen. Through these and similar changes, the constantly 
accruing replacement fund helps to adapt a community's capi- 
tal to a community's need for capital goods. 
Differences § 143. If industrial changes should be suddenly suspended 
of Interest ^^^ opportunity given for industrial forces to come to an 
Eliminated equilibrium, different rates of interest would be found to pre- 
petition vail in different branches of production and even in the same 
branches for different firms. Some of these differences would 
be apparent merely, being due to the larger allowance needed 
for the replacement of capital goods where they are liable to 
accidental destruction. Others would be genuine, and it will 
be instructive to observe how they would disappear as society 
approached the state of normal equilibrium. 
Differences Consider first differences among different firms in the same 
Same branch of production. One firm has preceded all others in 

Branch of putting in some superior machine or other form of capital, and 
this gives it higher earnings until others gradually introduce 
the superior machines into their plants also.* But competi- 
tors are always trying to keep their plants up to the highest 
point of efficiency. If invention and improvement in processes 
were suspended it would take but a short time for the very best 

* These higher earnings are called " profits " in Chapter X. in con- 
formity to business usage. In describing them here as " interest" we 
simply go a step further back and attach them to the superior capital 
goods to which they owe their existence. 



Different Branches of Production 247 

equipment to be introduced into all freely competing establish- 
ments. Those unable to modernise their processes would be 
forced into other industries as society approached the state of 
equilibrium. They could not sell at the normal price and con- 
tinue to make the wages of management they might secure in 
other industries. Allowing time enough for the process, there- 
fore, it is evident that in the absence of patents, or other 
monopoly conditions, the earning power of capital goods in 
different competing establishments would be equalised. 

But between different branches of production differences Differences 
might still persist. Shoe machinery might, for example, be Branchesof 
earning more than textile machinerj^ But if this were the case, Production 
one or both must be earning less or more than the current 
rate of interest for capital generally. If shoe machinery were 
earning more than the current rate, competing shoe manu- 
facturers would tend to enlarge their plants to secure the extra 
interest on a larger investment. By so doing they would, on 
the one hand, make drafts on the country's free capital tending 
to enhance the rates of interest other entrepreneurs would have 
to pay to secure the capital needed to keep their plants intact, 
while, on the other, they would tend to depress the price of 
shoes by increasing the supply and in this way to lessen the 
total to be divided among all the shares in distribution in this 
branch of production. As the result of action and reaction the 
extra earnings of shoe machinery would disappear. If, on the 
other hand, the difference was due to the fact that textile 
machinery was earning less than the current rate in industries 
generally, the conditions would be favorable to a reduction in 
the number of textile plants and the gradual release of capital 
for other investments. This would tend to raise the price of 
textiles and give larger returns to textile machinery, while it 
at the same time reduced the relative earnings of capital goods 
in other industries by permitting a slight expansion. As 
society approached the state of normal equilibrium, differences 
in interest rates would be less common and less extreme in 
consequence of such changes and adjustments, and before the 
normal state was reached they would have entirely disappeared. 
Only on this condition could a permanent equilibrium be estab- 
lished, since any difference in interest rates is itself a reason for 



248 Distribution : Interest 

change. When the state of equilibrium was reached, capital 
goods would be so distributed that each branch of production 
would have just its quota of capital embodied in the best form:. 
of capital goods known to entrepreneurs, and no more. The 
earnings of each unit of capital in each capital good would be 
kept the same so long as the equilibrium continued as those 
of every other, and the division of the free-flowing replace- 
ment fund among different branches of production would be 
simply the automatic restoration of the wastes of production, 
accomplished as perfectly as is the restoration of the v/astes of 
the human body through the processes of life. 
Causes of § 144. The above analysis of the process by which differ- 

in Rates ences in rates of interest would be eliminated, if industrial 
changes were com.pletely suspended, helps to explain why in 
actual industrial society differences are found. To the extent 
that the mobile replacem.ent fund that has been described fails 
to multiply forms of capital the moment they are needed, or to 
withdraw otlier forms the moment they are superfluous, there 
is opportunit}^ for differences in the earning power of capital 
goods. The circum.stances which cause such differences to 
arise will now be briefly indicated. 
Monopoly The most familiar ground for differences in the return from 

different investments is the presence of monopoly. The 
monopolist deliberately restricts the output of the monopolised 
product so that the returns to the capital and labour he em- 
ploys exceed those to be realised in competitive industries. We 
have designated the surplus return as monopoly profit, but 
since it frequently comes to investors in the form of dividends 
it is often thought of as a part of interest. In a sense monopoly 
profit is a part of the share of income ascribed to the capital 
goods which figure in monopolistic production. This is par- 
ticularly true when the basis of the monopoly is a patent. 
Patented machines do earn the larger returns which they en- 
able their owners to secure. At the same time the reason for 
the larger earnings is always the monopoly, and it conduces to 
clearness to consider dividends from investment in monopo- 
listic enterprises as m.ade up in part of interest and in part of 
monopoly profit. 

The close resemblance of interest on permanent improve- 



Interest on Permanent Improvements 249 

merits to rent has already been commented upon. Such im- interest ou 

provements will not be made unless there is sfood reason to Permanent 
^ . *=• Improve- 

think they will afford at least the current rate of interest, but meuib 

after they have been made the capital invested becomes a part 
of the land itself and receives income in obedience to the law 
of rent. If the anticipations of the investor are exactly real- 
ised, such capital goods afford an income corresponding to the 
current rate of interest, but only so long as industrial condi- 
tions remain undisturbed. Prospectively regarded such an in- 
come is interest, retrospectively it is rent. 

Every specialised form of capital is subject to a certain ex- Specialised 
tent to the same limitations as permanent improvements. Con- Capital 

sider, for example, a factory which it takes a year to build and ^^ve Little 

, . , . , • , , , , • , , , Mobility 

which cannot, without considerable loss m value, be turned to over Short 

account in another branch of industry than that for which it Periods 
was designed. The investment of capital in such a factory will 
only be made in case there is good reason to expect that it will 
earn at least the current rate of interest. But before the factory 
can be available for production a year must elapse. In this 
time changes may occur. The prudent investor will hesitate 
to transform his free capital into a factory until there is a mar- 
gin of prospective return over and above the current rate of 
interest to compensate him for the risk he incurs. It follows 
that until the earnings of specialised capital goods exceed, to 
some extent, the current rate of return on free capital such 
goods will not be multiplied. Competition among investors 
stops before the earnings of such goods are reduced to the gen- 
eral level. On the other hand, after the factory has been 
erected, the capital invested in it can neither be withdrawn nor 
allowed to remain idle without considerable loss to the in- 
vestor. If industrial conditions change so that the share of in- 
come assigned to the factory diminishes, the investor must 
make the best of the situation. Instead of getting the interest 
he expected, or even the current rate on free capital, he may 
obtain only one-half the current rate or even less, and 3^et it 
may pay him better to keep the factory in operation than to 
close it or try to turn it to some other use. Under such 
circumstances the earnings of specialised capital goods may 
depart widely and for considerable periods from the cur- 



250 



Distribution: Interest 



/Ind are 
Conse- 
quently 
Liable to 
Depreciate 



Differences 
in Risk 
of Loss 



rent rate of interest. Factories and other capital goods 
whose creation requires a good deal of time may earn more 
than the current rate of interest for months and even 
for years. Specialised capital goods, which wear out very 
gradually and require each year but a small allowance for 
replacement, may, on the other hand, in the face of ad- 
verse conditions earn less than the current rate for equally 
long periods. In communities in which changes in the de- 
mands of the market and in the methods of production are 
constantly occurring, variations from the normal rate of 
interest will be so common as to obscure the fact that competi- 
tion tends to establish one uniform rate of interest for all capi- 
tal goods. When com.petition is free, however, this tendency 
is always active, and even in a country as progressive as the 
United States it confines variations in most investments within 
narrow limits. 

As already pointed out, the business community anticipates 
the equalising influence of competition by revaluing specialised 
and fixed forms of capital goods, so that their prices always 
stand in about the same relation to their earnings. The actual 
capital invested in an enterprise ceases to measure the value of 
the capital goods used in connection with it as soon as the earn- 
ing power of these capital goods is established. Free capital 
goods must continue to command the current rate of interest or 
be diverted to other uses. Their value is accordingly fairly 
stable. Specialised capital goods cannot be diverted easily and 
hence must depreciate heavily if the enterprise proves less suc- 
cessful than was anticipated. Such depreciation finds its ulti- 
mate limit in the value of such goods for other industrial uses. 
In the case of highly specialised goods this value may be only 
that of the materials of which they are made. 

§ 145. Another cause of differences in interest rates also con- 
nected with differences in the risks involved in different in- 
vestments, results from the danger of accidental destruction to 
which some capital goods are exposed. Whenever this danger 
may be provided against by the machinery of insurance, the 
difference figures simply in the larger replacement fund which 
must be earned in addition to current interest by the capital 
goods affected. In many cases the danger is too irregular and 



Differences in Social Esteem 251 

uncertain to be insured against, and the increased interest 
needed to attract capital into tlie precarious investment depends 
upon the temperament of investors. Conservative people will 
be deterred by the fear of loss from investing at all in such 
enterprises. More reckless and optimistic capitalists may be 
induced to take great chances by the promise of only a slightly 
larger return than the current rate of interest. 

Besides differences in risk, differences in the social esteem Differences 
in which different investments are held may cause differences Esteem 
in rates of interest. For example, in most countries the busi- 
ness of the pawnbroker is in ill repute and in consequence 
competition in that business is confined to a limited number of 
persons. The men who have the shrewdness and callousness 
to public opinion which such enterprises require are able to 
make the capital they control earn large returns. These 
should be attributed in part to the high wages of management 
which such disagreeable occupations command, but are also in 
part due to the capital itself. If more capital were available 
for such businesses the incomes of pawnbrokers would be 
materially reduced. Unfortunately capital is so easily de- 
tached from the person of the owner that this consideration 
has less effect on modes of investment and rates of interest 
than might be expected. A striking illustration of the lack of 
a sense of responsibility which those having capital to invest 
often evince was brought to light recently in New York City 
when it was discovered that a prominent church was deriving 
a part of its revenues from the ownership of some of the worst 
tenement houses in the city. When those charged with funds 
intended to further the mission of Christ can permit them to be 
invested in insanitary and immoral tenements, not much re- 
gard for public welfare is to be expected from ordinary 
investors. 

In addition to the differences in rates of interest earned in Differences 
different investments and by different kinds of capital goods, i° Rates 
there are differences among different sections. Although Different 
much more readily transported to the best market than labour, Sections 
capital also is timid about venturing far from its source of 
origin. Capitalists usually feel that they can better estimate 
the risks involved in investments near home than at a distance. 



252 Distribution: Interest 

In consequence of this feeling capital tends to be concentrated 
in the centres where men of wealth live, and new and backward 
communities are able to command less than their proportionate 
share of the available capital equipment. Instead of there 
being one rate of interest on free capital in a country like the 
United States there are a variety of rates, ranging from the 
low rates found in the large cities and the manufacturing sec- 
tions of the North and East to the high rates prevailing in the 
agricultural and mining regions of the South and West. A 
variation of from two to three per cent, between the rates of 
interest regularly charged for equally good loans by banks in 
New York City and Arizona roughly reflects the difference 
in the earning power of capital goods in the two localities. 
As different sections are brought into more intimate business 
relations the supply of capital tends to distribute itself more 
equally over the entire industrial field and such differences be- 
come less marked. As in the case of wages, differences in 
rates of interest among different countries are likely to per- 
sist long after differences among different sections of the same 
country have become insignificant. 

Interest R 1^5^ In the foregoing discussion interest has been spoken 

on Money , , . ^ . , , , „ r -i- 

of as the earmngs of capital goods. An equally familiar aspect 

of it is in connection with the borrowing and lending of money 
or purchasing power. Interest for the use of purchasing power 
presents no exception to the general statement that it is the 
share of income earned by capital goods, since pieces of money 
are themselves such goods, but the reasons for the payment 
of interest for the use of money require special explanation^ 
The whole problem is complicated by the fact that under 
certain limitations credit, or mere promises to pay money 
made by individuals or banks in which the pub'ic has con- 
fidence, may serve the sam€ uses as money and like it com- 
mand interest. To avoid the discussion of these complica- 
tions until we are ready to consider the subjects of Money and 
Credit, it will be assumed in this section that forms of credit 
play no part as a medium of exchange, that the only money 
used is that composed of the standard monetary metal and that 
the coinage policy of the community is similar to that of the 
United States in that it maintains a constant parity in value be- 



Money or Purchasing Power 253 

tween standard coins and the metal they contain. Under such 
circumstances money would be simply one of the goods in 
general use that was singled out to serve as the medium of 
exchange, but whose value was determined by the same con- 
siderations that affect the values of other goods. 

The efficiency of money as the medium of exchange depends Reasons 
upon the readiness with which it passes from hand to hand, jx^y^j^ent 
and hence the best and most economical money is that which of interest 
circulates most freely. Such money contributes to production ofVloaey^ 
as truly as do the tools, machines, and other capital goods 
•which were made prominent in the preceding sections. With- 
out it the exchanges of goods necessary to the continuance of 
the division of labour which adds so much to production would 
be seriously restricted. As the tool of exchange, money is 
accepted readily for other capital goods, and for stocks, bonds, 
and mortgages on which interest is paid. As long as this is the 
case and capital goods, or stocks, bonds, and mortgages earn 
interest, money must also command interest. It is not only 
itself an important capital good, but it is the medium by means 
of which any and all other capital goods may be acquired. 
The second circumstance causes it always to possess a deriva- 
tive earning power corresponding to the current interest rate 
earned by capital goods generally. 

In a community in which all goods are bought and sold for Money or 

money, money is the fonn in which first appears not only all Power the 

income, but also the replacement fund which reimburses tlie Form first 

capitalist for the gradual destruction of the capital goods in by the Re- 

which his means are embodied. The way in which it is spent placement 
, . , ,,,,..,. , Fund 

determmes on the one hand the direction to be given to the 

machinery of production, and on the other the forms of capital 
goods to be added to this machinery in place of the capital goods 
that are destroyed in each productive period. As money flows 
from the buyers of goods to sellers the destination of the 
greater part of it is already determined. It pays bills and debts 
that have been contracted during the process of production, se- 
cures necessary materials, or effects indispensable repairs of 
plant and equipment. A part of it only is free to be spent or 
invested as the judgment of the entrepreneur may determine. 
This part constitutes the free fund of purchasing power which 



254 



Distribution : Interest 



Interest 
on Money 
Loans 
Made 
Uniform 
in each 
Money 
Market 



Differences 
in Risk 
Cause 
Differences 
in Rates 
of Interest 



serves, as explained in a previous section, to give a high degree 
of mobility to all capital. 

The rate of interest that will be paid for the use of money, 
or purchasing power, is kept uniform within each money mar- 
ket in the same way that the prices of identical goods are kept 
at a parity in a goods market. Individually borrowers of money 
wish to pay as little as possible, but they are willing to pay up 
to a certain rate rather than not secure a loan. Individual 
bankers and other lenders wish to get as high rates as possible, 
but will accept rates down to a certain point rather than have 
their money idle. Bankers and other lenders propose rates just 
as goods-dealers fix prices for goods. Borrowers indicate by 
their eagerness in accepting the rates named whether they are 
low enough to effect the loan of the purchasing power avail- 
able for the purpose. As the result of bargaining and compe- 
tition the rates on each class of transactions are at length 
adjusted, and each lender is forced to accept about the same 
rate as every other. 

In the case of interest on money loans there are differences 
in rates corresponding to the differences in the earning power 
of capital goods and due to the same general causes. Since 
money commands interest because it stands for the capital 
goods for which the borrower proposes to exchange it, the 
risks connected with investments in capital goods attach also 
to loans of money. The chief difference is that the borrower 
of money usually pledges himself personally to repay the loan 
even though the business enterprise for the formation of which 
he secures it turns out badly. If he is a man of means or of 
unquestioned honesty and business ability this personal 
guarantee will serve to offset a large element of risk in the 
enterprise to be furthered by the loan. If, on the other hand, 
all his wealth is embarked in the single venture and its failure 
is likely to cause his own bankruptcy, the personal guarantee 
will be of little value and the lender will become practically a 
partner in the enterprise. Because of such differences in the 
risks involved in different transactions and other circumstances 
discussed in Chapter XVIII., the rates of interest on money 
loans vary within wide limits. 

§ 147. In the preceding sections the causes of differences in 



Marginal Wages and Marginal Interest 255 

the rates of interest have been discussed and the process has Differences 
been traced by which the earnings of all goods would be ^JJ. i^^g^j^st 
levelled to one uniform rate in a society brought to a state of Less 
normal equilibrium. Such a consummation is much nearer at ^.^^j^ 
hand in actual industrial society than is one uniform rate of Differences 
wages. Capital goods are impersonal. As they wear out they 
create a free replacement fund which is constantly available to 
equalise their earning powers. Moreover, capital passes much 
more readily from one part of a country to another than does 
labour. If industrial changes should be completely suspended 
for but a few years, substantial equality in interest rates might 
be expected to establish itself over a wide region. These facts 
cause economists to use the expression " general rate " in 
reference to interest, as they would not be warranted in using 
it in connection with wages. By it is meant the rate which 
economic forces tend to make general. In the following 
discussion we will use that expression, or the more precise 
phrase " marginal rate," as convenience may dictate. The pre- 
cise rate of interest is, of course, not in question in this section^ 
but rather the causes which unite to make the rate high or low 
and to determine its relation to other shares in distribution. 

We are now prepared to consider the relation between the How 
different shares in distribution and to prove our thesis that the Wa^T and 
general or marginal rate of interest and the marginal rate of Marginal 
wages or the rate of wages of marginal workmen tend, under are De- 
conditions of free, all-sided competition, to equal the contribu- termined 
tions which the respective factors make to production. To sim- 
plify the discussion we may assume that free competition has 
eliminated net or competitive profits, as it constantly tends to 
do, so that the reward of entrepreneurs is confined to their 
wages of management, which obey the same principles as wages 
generally. Monopoly profits are, of course, excluded from the 
problem since their very existence is inconsistent with the free 
competition assumed. Even were this not the case we should 
be justified in ignoring them in connection with the present 
problem, since the wage and interest rates paid for workmen 
and capital goods in monopolistic enterprises are usually ad- 
justed to the rates paid in competitive businesses. Entre- 
preneurs controlling monopolies wish^ as much as other entre- 



256 



Distribution : Interest 



Marginal 
Rates may- 
be Studied 
at the 
Margin of 
Cultivation 



Entire 
Return at 
the Margin 
Constitutes 
Wages and 
Interest 



The Cir- 
cumstances 
Determin- 
ing the 
Amount of 
the Joint 
Share 



preneurs, to secure their productive factors as cheaply as possi- 
ble. They could afford often to pay very high wages and 
interest at the expense of their monopoly profits, but as a mat- 
ter of fact they usually pay only a little if at all higher rates 
than those fixed by general, that is, competitive, conditions. It 
follows that the explanation of wages and interest that applies 
to competitive industries will apply also, so far as these shares 
are concerned, to monopolistic industries. 

The explanation of rent given in Chapter XII. leaves its rela- 
tion to wages and interest in no uncertainty. It is a differential 
return due to the superiority of the land or other natural agent 
used in the given productive enterprise in comparison with 
marginal land devoted to the same purpose. At the final mar- 
gin of production it does not appear at all ; at other points it 
takes the surplus due to natural conditions and in no wise 
affects the shares, wages and interest. Within each labour 
market the same rates of wages, approximately, are paid for 
the same grades of labour, whether rent happens to be another 
item of expense which the entrepreneur incurs or not. The 
same statement holds true of each market for loans of capital. 
It follows that an explanation of the causes fixing wages and 
interest at the no-rent margin of production is a complete ex- 
planation. The same forces are active in every other part of 
the industrial field and serve to determine wages and interest 
in practical independence of rent. 

With profits eliminated and rent explained in entire inde- 
pendence of the other shares, there are left to be analysed the 
causes which determine the division of income between wages 
and interest. At the final margin of production in competitive 
enterprises the entire product is divided between these two 
shares, and before we attempt to explain the law of division it 
will be well to recall the influences which determine the amount 
of this joint return. 

§ 148. If the joint share which goes to labour and capital at 
the margin of production includes the entire product which 
free land, labour, capital, and the organising ability of entre- 
preneurs produce at the margin, its size depends obviously upon 
all of the factors that were discussed in the chapters on Pro- 
duction. Of primary importance is the quality of the land and 



Influence of Entrepreneurs 257 

the natural agents which are used at the margin. In a country- 
like the United States, which is abundantly supplied with land 
and natural resources in proportion to its population, the lands, 
mines, forests, fisheries, sources of water power, etc., which are 
used at the margin are rich and afford large returns to the 
labour and capital applied to them. Up to a quite recent period 
in the history of America, improvements in transportation 
facilities and the discovery of new sources of natural wealth 
have kept pace with the growth of population and of capital 
and the margin of production has been lowered but little, if at 
all. It has been from tlie first discovery of the country very 
much higher than the margin of production found in Europe, 
and this has been a chief cause of the high earnings which 
labour and capital have commanded in the New World. 
Wages and interest have been higher because labour and capi- 
tal have been more generously assisted by nature in marginal 
industries where this assistance has been gratuitous. 

Next to the location of the margin of production, the The 
efficiency with which labour and capital are correlated in pro- of Entre- 
duction is the most important influence determining the amount pieneurs 
of their joint share. This depends upon the intelligence and 
enterprise of entrepreneurs. The United States is fortunate in 
this regard also. Its captains of industry compare favourably 
with those of any other country and it is doubtful if industrial 
organisation is anywhere more highly developed. Through 
efficient organisation labour and capital succeed in producing 
and earning more than they could if less intelligently directed. 

Other factors influencing the result are the industrial capacity Qualities 
of the labourers as individuals. The more ability and energy Quantities 
they put into their work the larger will their return be. of^ 
Equally important is the efficiency of the forms of capital ^^^ Capital, 
utilised in production. If im.proved tools and machinery, con- Goods 
venient and sanitary buildings, etc., are the forms into which 
the community's capital is thrown, the returns will be larger 
than if poor implements and badly planned structures predomi- 
nate. The efficiency of the forms of capital used depends upon 
the progress that has been made in invention and discovery. 
In this field, also, the United States compares favourably with 
•other countries. Its capital equipment is not perhaps quite as 



258 



Distribution : Interest 



Both 

Wages and 
Interest 
High in the 
United 
States 



Workmen 
and Capital 
Goods 
Compete 
As well as 
Co-operate 



large in proportion to its population as is that of some older 
countries, but it is up-to-date and efficient. By its aid the 
product shared between labour and capital in marginal indus- 
tries is further increased. 

Through these influences, and all of the others discussed in 
the chapters on production, the joint share of income which 
goes to labour and capital is determined. If the conditions are 
favourable, as they unquestionably are in the United States, the 
joint share will be large. The terms of its division between 
labour and capital themselves determine whether wages will 
be high relatively and interest low, or interest high and wages 
low, or both wages and interest high together. The last con- 
dition is that found in the United States in comparison with 
conditions in European countries. 

§ 149. We are now ready to discuss the causes which deter- 
mine the division of income between wages and interest. As 
each is paid for the part which the respective factors, labour 
and capital, play in production, we should expect the amounts 
paid or the rates of wages and interest to be in proportion to 
the importance of the services which each renders, and this is 
in fact the case. As already suggested, workmen and capital 
goods not only co-operate in production, but compete. At some 
points in every industry entrepreneurs have the alternative of 
using certain grades of labour or certain forms of capital for 
the accomplishment of a desired result. Lifting may be done 
by capital goods in the form of elevators, cranes, etc., requir- 
ing only human guidance, or by workmen laboriously climbing 
ladders with loads on their backs. Moving may be accom- 
plished by men trundling wheelbarrows or pushing tram cars^ 
by means of horsecars, or by steam railroads. Similarly in 
manufacturing, the tool-equipped workman is ever a com- 
petitor of the automatic machine. Even in agriculture steam 
plows may be used in place of horse plows with a considerable 
saving in labour, and harrowing, planting, reaping, and other 
processes may be performed through the use of machines of 
varying degrees of complexity, or by hand tools. In deciding 
between capital goods and workmen at these competing points, 
the guiding principle always acted upon by entrepreneurs is to 
choose that combination of factors which, in proportion to its 



Labor and Capital Competitors 259 

efficiency, is cheapest. Workmen are substituted for capital as 
long as it pays to make the change. At other points capital 
goods are substituted for labour up to the same limit. Every 
such substitution tends to enhance the price that must be paid 
for the use of the preferred factor, since it involves increased 
demand for it without any change in its supply. It at the same 
time tends to lov^er the price that must be paid for the factor 
that is rejected. Its supply is increased without any corre- 
sponding increase in demand. In actual society, where changes 
are constantly occurring not only in the quantities of labour 
and capital, but in the methods of production and the kinds of 
capital used, these substitutions occur constantly and the dis- 
tribution of labour and capital is far from being at any one time 
what it is tending to become. If changes were to be suspended, 
substitutions of workmen for capital and of capital goods for 
labour would continue for a time, but each substitution would 
help to bring society nearer to the state of normal equilibrium. 
When that state was reached capital goods would continue to 
be used for many purposes for which they alone are suited, and 
workmen would continue to be employed at many tasks which 
could not possibly be done by the most perfect machinery or 
other capital goods. At other points capital goods would be 
doing tasks that might be done by labour, while workmen 
would be doing things that might be effected through capital. 
For some of these tasks one or the other would be distinctly 
preferable so long as wage and interest rates remained as they 
were, and therefore they would be little involved in the substi- 
tutions made after changes were suspended. In the case of 
others the choice between the factors at current rates of wages This 

and interest would be a very nice one. Entrepreneurs would Competi- 

-' . , ^ . tion Leaas 

continue for some time to make substitutions at these points, toCompari 

and these substitutions would serve for somiC time to cause ly^^sfj^u 

changes in wage and interest rates which would make further tions by 

substitutions desirable. The range of these changes would con- ^^aee and 

tract steadily as the state ofnormal equilibrium was approached, Interest 

and when that state was reached capital goods would be so determined 

assigned that their net addition to the product just covered the 

rate of interest that had to be paid for them, and workers would 

be so assigned that they received just what tliey produced also. 



26o 



Distribution : Interest 



The Law 
of Distribu- 
tion for a 
Society in 
the State 
of Normal 
Equilib- 



The 

Same Law 

Applies 

Roughly to 

Actual 

Industrial 

Society 



Only on this condition could there be a state of equilibrium, be- 
cause paying to owners of capital less than capital goods pro- 
duced, or to workers less than they produced, would involve a 
fourth element in distribution, an extra profit to the entre- 
preneur. Competition eliminates this extra profit only by 
bidding up wages and interest until each corresponds accu- 
rately to the addition that workmen and capital goods con- 
tribute to the product. The measurement of these additions 
economically ascribable to workers and capital goods is 
effected very simply by means of substitutions. Capital goods 
are substituted for labour and workmen are substituted for 
capital down to a margin of indifference, where both factors 
are equally cheap at prevailing rates of wages and interest. 
At these points wages paid for labour secure the same product 
as the same sum spent on interest for capital. The product- 
iveness of the two factors is compared and each receives the 
exact equivalent of what it contributes to production. The 
law zvhich determines the division of the product between 
labour and capital in competitive industries for a society in a 
state of normal equilihrium is, therefore, that each receives the 
share that it produces. As all capital goods will have the same 
earning pov^^er, the earnings of the goods at the margin of in- 
difference will fix the general rate of interest. All grades of 
workmen will not be compensated equally, but as their earnings 
are arranged in a scale, in the manner explained in the last 
chapter, the determination of the earnings of marginal work- 
men will serve indirectly to determine the wages of all. 

Although rarely exactly established, and never maintained 
for any great length of time in actual industrial society, the 
margin of indifference betv^^een labour and capital that has 
been described is of the greatest practical consequence. The 
efforts of entrepreneurs are constantly directed towards using 
capital goods only dov/n to the margin of indifference on the 
capital side, and towards employing workmen only down to 
this margin on the labour side. To overstep it in respect to 
either is to incur loss, while on the other hand failure to push 
the use of the productive factors to this limit in each branch of 
production is to fall short of the competitive ideal which dis- 
tributes labour and capital over the industrial field in exact pro- 



Law of Distribution Illustrated 261 

portion to the need there is for them. In actual industrial 
society the use of additional capital goods here, and the em- 
ployment of more workmen of a given grade there, or the with- 
drawal of capital goods or the discharge of workmen, have for 
their object better conformity to the ideal arrangement of 
labour and capital that has been described. At any given time 
a rough approximation to the ideal towards which competitive 
forces are always straining is actually presented, and compari- 
sons between the productiveness of quantities of capital and 
quantities of labour are being m.ade by entrepreneurs in every 
branch of production and are determining their business deci- 
sions. Thus we conclude that the rate of interest earned by 
capital goods and the rate of wages earned by marginal work- 
men tend to correspond to the contributions which the respect- 
ive factors make to the product of industry at the margin of 
indifference where their contributions are measured, and that 
these marginal rates are standards to which all other rates are 
adjusted. 

§ 150. It should be carefully noted that the productiveness The Law 
of either labour or capital, as measured by economic forces, f^TjP'f' 
depends not only upon the location of the margin of produc- Illustrated 
tion and its own efficiency and supply, but also upon the effi- 
ciency and supply of the other factor. This may be made 
clear by means of an example. Let the reader im.agine an 
island community which has an abundance of land of the 
best quality and therefore no occasion to pay rent, and 
from which monopoly is absent, so that the products of 
industry are divided by competition between wages and 
interest. Suppose that at the outset there are looo workers 
and $1,000,000 v/orth of capital embodied in those capital 
goods for which the community has most need. Assume fur- 
ther that the net product of a year's industry is worth $600,000 
and that it is divided by the method just explained so that 
$500,000 or an average of $500 to a man is assigned as wages, 
and $100,000, or ten per cent., is assigned to capital goods as 
interest. These rates of wages and interest measure the pro- 
ductiveness of capital goods and v^^orkers as determined by 
comparisons at those points where they may be substituted for 
each other. Now suppose that instead of consuming its entire 



262 Distribution: Interest 

income the community saves ten per cent, of it, that is, acts in 
such a way that ten per cent, of the net product of the year's 
business will take the form of new capital goods to be added 
to the continuously renewed original stock of capital goods, and 
only the rem.aining ninety per cent, of the product the form of 
consumers' goods. This, it must be noted, involves psycho- 
logical changes in the people, but why these occur we need not 
here inquire. Let the population meantime merely renew itself 
so that there are still 1000 workers. The total capital for the 
second year's industry is now $1,060,000. The addition of the 
new capital will tend at once to lower the rate of interest. The 
free loanable fund is larger, and those controlling it as it 
arises, bankers, etc., will compete against each other to induce 
entrepreneurs to take it. As interest goes down wages, on 
the other hand, will tend to go up. To utilise the new capital 
to best advantage more workmen are needed, and entrepre- 
neurs to whom the capital is entrusted will compete against 
each other in hiring workmen. These are temporary effects. 
To decide whether they will remain as permanent results after 
the new capital has been assimilated by the producing mechan- 
ism we must consider how the productiveness of units of capital 
and units of labour under the new conditions will compare with 
their productiveness before the change. The addition of 
$60,000 to the capital fund will cause a recasting of the whole 
capital-goods equipment of the society. The $1,000,000 worth 
of capital was already embodied in the most needed forms of 
tools, machines, etc. Since there are no new workers the new 
capital must be embodied in less needed forms to supplement 
the old forms that continue to be renewed, or else must be 
combined with the old capital released as old capital goods 
wear out to replace these old forms with new and more costly 
tools, machines, etc., that are more efficient, but not to the full 
extent of their increased prices. Incidentally some of the nev/ 
capital goods will be used for purposes for which workmen 
were previously employed before they became relatively so 
scarce. The productiveness of capital goods in the marginal uses 
to which capital is put will, in the absence of improvements in 
methods of production, be lessened by these changes. The 
forms of capital goods which it now pays to use are less 



Interdependence of Wages and Interest 263 

needed. They add less to the product of industry and those 
who supply them must be content with less interest. But if 
interest falls at one point it must, for reasons already ex- 
plained, fall over the entire industrial field before adjustment 
is complete. Hence we may conclude that the fall in the rate 
of interest noted as a temporary effect of the increase of capi- 
tal will prove pennanent. 

But by so much as capital in the illustration has lost in rela- An 
tive importance, labour has gained. With their superior equip- of ^plfal 
ment workmen can produce at least as much more than before Increases 
as corresponds to the productiveness of the new capital goods. Marginal 
Suppose that the fall in the rate of interest amounts to 1-2 per Productive. 
cent. Then the total deduction from the year's product on ac- Labou»- 
count of interest will be 9 1-2 per cent, of $1,060,000, or $100,- 
700, of which 91-2 per cent, of $60,000, or $5700, will repre- 
sent the addition to the product ascribable to the new capital. 
The total product of the year's industry v/ill be the old product, 
$600,000, plus at least this new product, $5700, or $605,700. 
Since of this only $100,700 is now deducted for interest the re- 
mainder, or $505,000, will go to the 1000 workers as wages, 
or each will receive on the average $505 a year instead of the 
$500 previously earned. They are the same men v/orking no 
harder than before, but the increased supply of capital has in- 
creased their relative importance and, therefore, the share of 
the product economically ascribable to the part they play in 
production. In such a community capital might conceivabi}'" 
be increased until every known kind of capital good capable of 
earning enough for its own replacement was added to the com- 
munity's equipment and interest v/as lov/ered to nothing. Each 
addition to capital would increase the relative importance of 
labour and by the time interest was eliminated wages would 
have assumed princely proportions, although the workmen re- 
mained the same sort of men and continued to exert them- 
selves no more than when their earnings averaged but $500 a 
year. 

This assumed case is entirely hypothetical and the figures The Mutual- 
used are to be considered as illustrative rather than as matlie- pejf^eifce 
maticaJly exact, but the fundamental relation between wages of Shares 
and interest which it indicates is believed to be true of actual but) on 



264 Distribution: Interest 

industrial society. The introduction of rent and other com- 
plications will not alter this fundamental relation. The pro- 
ductiveness of labour will still depend not merely upon the 
richness of land and natural resources at the margin of culti- 
vation and upon the number and efficiency of the workmen, 
but also upon the kinds of capital goods in use and the quantity 
of capital. A change in any one of these factors will alter the 
economic importance of every other and consequently the share 
of the joint product that is economically ascribable to it as its 
share. It follows that a complete explanation of the rate of 
wages or of the rate of interest m.ust include a consideration of 
the causes which control the supply of workmen or the growth 
of population and the supply or increase of capital. Before 
adding this last link to the chain of explanation necessary to a 
complete theory of distribution, it will be desirable to review 
briefly the ground already covered and to meet certain objec- 
tions. This is the task of the next chapter. 

REFERENCES FOR COLLATERAL READING 

*Clark, The Distribution of Wealth, Chaps. IX., X., and XVII.-XXIII. 
*iT/«r5^a//, Principles of Economics, Book VI., Chaps. VI. -VIII., 
Hadley, Economics, Chap. IX.; Pierson, Principles of Economica 
Parti., Chap. IV.; *Carver, The Distribution of Wealth, Chap. 
VI.; */ohnso)t. Money and Currency, Chap, on Interest. 



CHAPTER XV 
VALUE, PRICE, AND DISTRIBUTION 

§ 151. We have now surveyed, in broad outline, the whole Summary 
field of consumption, production, and distribution, and are pre- ^f Vahie^"^ 
pared to discuss the ultimate determinants of economic rela- 
tions. We have seen that men habitually value goods not as 
aggregates, but as divided up into distinguishable units, such as 
pounds or bushels, and that the values they ascribe to these 
units are in proportion to their marginal utilities. We have seen 
that in industrial society making valuations is a social process. 
It is not the marginal utility of each good to each consumer 
that determines its value, but the marginal utility of each good 
to consumers as a whole. Moreover, goods are valued as 
bundles of utilities by adding together the marginal utilities of 
their different qualities to the groups which are just able to 
command those qualities. Thus the rich accept in large meas- 
ure the valuations which the poor place upon necessaries and 
comforts, and confine their influence to the valuation of 
luxuries. Socially speaking, however, the values of goods are 
determined by their marginal utilities. 

From the point of view of consumption, value in use, the re- Exchange 
lation between goods and men, is all-important. In produc- ^^i"p • 
tion and distribution its derivative, value in exchange, con- 
cretely represented by price, holds the forefront of interest. 
The exchange value of a good is its power to command other 
goods in exchange for itself. Price is exchange value in terms 
of the good used as a medium of exchange, or money. So 
long as money is invariable in its exchange value or purchas- 
ing power as regards goods generally, money prices are accu- 
rate measures of exchange values. Such invariability is 
assumed as a means to simplifying economic analysis in this 
as in previous chapters. 

The determination of money prices was shown to result from 

265 



266 Value, Price, and Distribution 



The Law 
of Price 



Relation 

between 

Incomes of 

Consumers 

and the 

Expenses 

of 

Production 



The 

Influence 
of 

Monopoly 
tipon the 
Shares of 
Income 
Secured 
in Com- 
petitive 
Industries 



bargaining and competition among buyers and sellers and it 
was found that laws of price might be formulated from the 
point of view of either. From the side of buyers the tendency 
is for price to correspond with the money equivalent of the 
marginal utility to the marginal buyer of the good purchased. 
It thus depends in part upon buyers' scales of wants and in 
part upon the sums of money which they have to spend. From 
the side of sellers the law of price depends upon the conditions 
of production. Under conditions of monopoly the tendency is 
for the monopolist to charge the price calculated in the long 
run to afford the largest monopoly profit. Under conditions 
of free competition, on the other hand, the price tends to cor- 
respond with the expenses of production to representative 
firms. The actual price is usually somewhat above or some-, 
what below this normal and allows for a competitive profit or 
loss to the entrepreneur. 

These laws of price leave unconnected two factors that are 
intimately related to each other — ^the sums of money which 
buyers have to spend and the profits and expenses of produc- 
tion which figure in the calculations of sellers. Generally 
speaking these are the same sums of money, for what buyers 
spend is their money incomes, and money incomes arise because 
of the part which those who receive them pl-ay in production. 
They are either profits, rents, wages, or interest. To bridge 
over tliis gap in the explanation of prices and in so doing to 
supply a complete theory of value and price is the task of the 
theory of distribution. It recognises that buyers and sellers, 
consumers and producers, are, in general, the sam.e individuals 
and that the whole machinery of buying and selling is simply 
a convenient means of combining effectively the various factors 
in production and of assigning the appropriate shares of the 
product to those who have claims upon it. 

§ 152. The presence of monopoly in any branch of produc- 
tion makes possible the maintenance of prices above the ex- 
penses of production and the enjoyment of monopoly profit 
It is important to perceive just what effect such a profit has 
upon the other shares in distribution. As already explained, the 
only way in which a monopolist can hold up prices is by cur- 
tailing the supply of the monopolised good he offers for sale. 



The Influence of Monopoly 267 

Buyers will take a certain quantity of the good at the low price . 
just covering its expense of production. If a higher price is 
asked they will take less. Monopoly price means therefore a 
smaller volume of sales than that which might be effected at 
cost and a corresponding curtailment of production. Cur- 
tailed production means in turn reduced employment of the 
factors of production, land, labour, and capital, in the branch 
cf business affected, or a larger supply of these factors for 
competitive industries. If the rise of a monopoly is unaccom- 
panied by any other changes, such as the decline of other 
monopolies, the opening up of new lands, or a reduction 
of population, its effect will be to crowd labour and capital 
into other branches of production where they find employment 
only through an enlargement of the volume of production. If 
the law of diminishing returns is in operation, this will mean 
?i lowering of the margin of production and a lessening of the 
joint share upon the size of which the rates of wages and 
interest depend. Under such circumstances the rise of mio- 
nopoly profits tends to increase rent and to reduce wages and 
interest. From the point of view of the whole community 
monopoly profit thus signifies an uneconomical distribution of 
the factors of production and a smaller product at the margin 
to be shared between labour and capital. This loss to labour and 
capital applies as well to wage-receivers and interest-receivers 
who boycott the products of monopoly as to those who buy 
those products and thus incur a further tax in the excessive 
price they have to pay for them. It must not be inferred from 
this analysis that the effects ascribed to monopoly are com- 
monly experienced in modern progressive communities. Mod- 
em monopolies derive their profits less frequently by actually 
raising prices than by lowering their expenses of production 
and hence they tend not so much to reduce wages and interest 
as to prevent them from rising to the extent that they might 
if the economies of concentrated production and prices, deter- 
mined by the expense of production, could be enjoyed together. 

§ 153. In order to restate the laws determining rent, wages, Graphic 
and interest it will be necessary to advert for the last time to taticm oT~ 
the relations that would prevail in an industrial society brought Production 
to the state of normal equilibrium. In such a society the re- tribution 



268 Value, Price, and Distribution 

lation between production, distribution, and consumptioE 
would be extremely simple. Production would still be carried 
on as a serial process, but it could be readily analysed, since 
all prices would correspond exactly to the expenses of produc- 
tion and these would never vary. The whole matter may be 
represented graphically by the following figure: 




Fig. 9. 

In the above figure production is represented as subdivided 
into three great stages, A, B, and C. The extractive industries 
(A) . tmH out raw materials. Manufacturing (B) takes 
these and transforms them into manufactured products. 
Transportation and trade (C) deliver the latter as finished 
products to purchasers, who may be either consumers con- 
verting their money incomes into real incomes, or entre- 
preneurs converting the free replacement fund into capital 
goods to restore the wastes incidental to production. The 
figure represents movement without change. Goods are 
flowing continuously from stage A to B and from stage B to 
C. At C the stream is divided, an unvarying volume of capital 



Restatement of the Law of Rent 269 

goods flowing one way and an unvarying stream of consumers' 
goods flowing the other. The capital goods exactly replace 
the goods destroyed in the course of production and the con- 
sumers' goods exactly remunerate the owners of landj work- 
men, and owners of capital goods for the productive services 
which they or their possessions have rendered. Finally the 
prices of goods are invariable and everywhere just equal to 
their unvarying expenses of production. 

§ 154. How the expenses of production are determined was Restate. 
explained in the last three chapters. A brief restatement will the Law 
suffice to recall the principal points. Rent is paid for the serv- of Rent 
ices which different pieces of land perform in production. On 
the one hand are the various uses to which human wants and 
prevailing methods of production cause pieces of land to be 
put. On the other are the quantities of land of different quali- 
ties and in different situations. The most suitable pieces of 
land are assigned to the most important uses. To them are 
added less suitable pieces down to a margin where a given 
piece is equally valuable for some other use. If assigned to 
the first use the given piece must command a rent equal to what 
it was worth for the other use, as shown by comparing it with 
other pieces actually devoted to that use. This rent is a " mar- 
ginal rent " for all pieces of land assigned to the first and most 
important use. To it are added differentials measuring the 
superiority of pieces of land above this margin to determine 
their respective rents. The same process of comparison applied 
to pieces of land good enough only for inferior uses serves to 
determine their rents. At the very bottom of the scale are 
found pieces of land for which there are, economically speak- 
ing, no alternative uses. The " margin of indifference " for 
this lowest grade of land is the point where it does rot matter 
economically whether the land is cultivated or allowed to lie 
waste. At this point pieces of land can command no rent. 
Economically speaking they are superabundant and, therefore, 
free. From this lowest no-rent margin of indifference the 
rents of all better or more favourably situated pieces of land 
are measured. Rent is the differential which indicates their 
position in the economic scale. From the point of view of price 
it is the share of the total price that is economically ascribable 



270 Value, Price, and Distribution 

to the land itself. If this share is large it indicates that the 
land serves an important industrial use and that land equally 
well adapted to this use is scarce. 
Restate- 1 1^^. Wages are paid to workmen for their services in pro- 

the Law duction. Their determination results from calculations closely 
of Wages similar to those that are made in connection with rent, but the 
matter is more complicated because workmen are more adapt- 
able to different uses than are pieces of land, and because the 
number of workmen of difit'erent grades is more fully subject 
to human control. Moreover, the margin of indifference for 
workmen is not that between the least important tasks to which 
workmen of the lowest grade are assigned and tasks of no eco- 
nomic importance, but between these tasks and less important 
ones that are ruled out economically by the scarcity of work- 
men even of the lowest grade. As in the case of pieces of land, 
so in the case of workmen, there are on the one side the various 
employments for workmen of different grades determined by 
the wants of consumers and the current methods of production, 
and on the other tlie number of workmen of each grade fitted 
for these employments. Wages are determined by compari- 
sons just as are rents, only the basis from which all higher 
wages are measured is not no-wage, but low-wage workm.en. 
The A complete theory of wages has to explain not only existing 

MaSnal differences in rates of wages and the law by which marginal 
Workmen wages are fixed, but also why these differences persist. This 
we undertook to do by reference to the diverse standards of 
living found in each community and the influence of these 
standards in controlling the growth of population and deter- 
mining the industrial qualifications of the members of each 
successive generation of the world's workers. Marginal wages 
were shown, on the other hand, to be determined by compari- 
sons between the productiveness of workmen and of capital 
goods. At the margin of production where no rent is paid 
there is a product to be divided between labour and capital. 
The size of this product is the primary consideration upon 
which rates of wages and interest depend, and, as was shown, 
this is influenced largely by the location of the margin of pro- 
duction. If the number of the population is not so great com- 
pared with the natural resources of the country as to force a 



The Law of leterest 271 

resort to inferior lands, mines, etc., the no-rent margin will be 
located at a point where workmen and capital goods reap a 
large return. In the division between workmen and capital 
goods the location of the margin of indifference between them 
is the important consideration. This depends in part on the 
number and efficiency of the labou.ring population and in part 
upon the quantity and quality of the capital goods used in pro- 
duction. In general the law is that each factor obtains as its 
share of the price of the product an amount corresponding to 
what it has produced. Each factor, in other v/ords, gets the 
equivalent of its own product measured not absolutely, but, in 
the only way that it can be measured, comparatively. Wages 
above the marginal rate also correspond to what the workmen 
who receive them have, economically speaking, produced. 
They indicate the place each worker holds in the scale of pro- 
ductiveness. In reference to wages as a whole, then, as in 
reference to rent, we conclude that the law is for each work- 
man to get the share of the price of the product that he 
has himself contributed. 

§ 156. Interest is what is paid to the owners of capital goods The 

as remuneration for the services these goods render in produc- J^^'^'^' °* 
, . . * Interest 

tion. The great moDility of capital, which results from the 

constant destruction and replacement of capital goods, causes 
the latter to be available for each use for v/hich they are fitted 
in about the same proportionate quantity. In the assumed 
state of equilibrium the distribution of capital over the whole 
industrial field would be perfect. Capital goods would be sup- 
plied for each use down to the point where the interest they 
afforded just equalled the interest earned by other capital goods 
in other branches of production, and there would be one uni- 
form rate of interest over the whole industrial field. This rate 
is determined in the same way as is the marginal rate of wages, 
by comparing the productiveness of capital goods with that 
of workmen. At the margin of indifference, where either 
may be used indifferently for given purposes, the balance is 
struck between them. The location of this margin depends, as 
already stated, upon the number and efficiency of the labouring 
population and the quantity and quality of the capital goods 
used, and also upon all of the influences that determine the 



272 



Value, Price, and Distribution 



The 

Calculation 
of the Re- 
placement 
Fund 



The Life 
Period of a 
Capital 
Good 
Depends 
upon Rates 
of Wages 
and 
Interest 



amount of the joint share which labour and capital divide 
between them at the margin of production. 

There are certain difficulties which suggest themselves in con- 
nection with this explanation of interest that must be cleared 
up at this point. They refer to the calculation of the replace- 
ment fund which each capital good is assumed to earn along 
with its interest. It will naturally be asked just how the amount 
of the total replacement fund is determined, and, secondly, how 
the proportion that must be assigned to this fund each year is 
fixed. The total amount of the replacement fund for each capi- 
tal good equals, obviously, the price of the capital good. In the 
state of equilibrium assumed, this corresponds exactly to the 
expense of producing the capital good. This expense might be 
followed back in thought to the point at which the bare-handed 
savage appropriated fromx the storehouse of nature the materia! 
from which the first capital good was fashioned and the ex- 
pense of production consisted wholly of wages, but it is equally 
logical to take for granted the conditions determining the 
prices of the capital goods used in the previous stages of pro- 
duction and make these the starting point for an analysis of 
present relations. The total replacement fund must then equal 
the price of the capital good to be replaced as determined by its 
expense of production. 

The amount to be set aside each year for the replacement of 
a capital good depends upon its durableness and the standard of 
efficiency which it must maintain in order to make its continued 
use profitable. Circulating capital goods must be completely 
replaced as they are used. Fixed goods wear out at varying 
rates and no general rule can be advanced in reference to them. 
The standard of efficiency required of capital goods depends In 
general upon the location of the margin of indifference between 
capital goods and workmen. If this is such that the rate of 
interest is relatively low while the rate of wages is relatively 
high, capital goods must be discarded promptly as their effi- 
ciency falls below a certain high standard, in order that loss 
may be avoided. This is because in most of their employments 
capital and labour work together, and it is uneconomical to 
equip highly paid workmen with worn and inefficient tools and 
■machines when the use of new tools and machines may be had 



The Law of Competitive Distribution 273 

«on the payment of a low rate of interest The lower the rate of 
interest, accordingly, or the higher the rate of wages, the 
shorter the period that capital goods will continue to be used 
and the larger the periodic aliov/ance for their replacement 
which must be made out of their gross earnings. In the re- 
verse case, that is v/hen interest is high and wages are low, 
tools and machinery will continue to be used for a much longer 
interval and the accumuLtion of the replacement fund will be 
spread out over a correspondingly longer period. These con- 
siderations explain why cheap labour and old and inefficient 
capital goods are usually found together, while the almost cer- 
tain attendant of dear labour is an up-to-date and efficient 
equipment of capital. 

In distinguishing the earnings of capital goods into two ele- The Law 
ments, an interest fund and a replacement fund, we have merely Applies to 
followed the practice of the business community. The use of Gross 
money as the universal medium of exchange causes loans to be ©f Capital 
3nade usually in money rather than in the capital goods which Goods 
the borrower actually needs in his business and ultimately ob- 
tains by purchase with the money borrowed. The replace- 
ment in money of the principal borrowed causes interest to 
stand out clearly as a distinct item and accounts in large, meas- 
ure for the practice referred to. It would be an error, however, 
to conclude that the earnings of capital goods assigned to the 
replacement fund obey any different principle than those as- 
signed to interest. Competition tends to make the earnings 
devoted to both uses correspond to the contributions which 
capital goods make to the price of the product and in the as- 
sumed society this correspondence would be perfect. The law 
of interest applies, therefore, as well to the gross as to the net 
earnings of capital goods, and it may be laid down as a gen- 
eral principle for capital fjoods, as for pieces of land and 
workmen, that they tend to receive as their shares of the price 
of the product amounts corresponding to what they contribute 
to production. 

The general law of competitive distribution for a society ^estate- 
-allowed to attain the state of normal equilibrium is, then, that the Law ot 
^ach factor in production has assigned to it a share in distribu- [^°^^^g " 
;tion corresponding to what it itself produces. If rent, wages, tribution 



274 Value, Price, and Distribution 

and interest be defined as the prices paid respectively for tliue 
services to production of pieces of land, workmen, and capital 
goods, the law may be stated to be, that competition tends to 
put a price on the services of each of the factors of production 
corresponding to the price which attaches to its particular con- 
tribution to the product. In actual industrial society, as has 
already been pointed out, economic relations fall far short of 
this competitive ideal. Monopoly influences intervene to secure 
monopoly profits for some entrepreneurs at the expense of the 
shares assigned to wages and interest. Changes occur to throw 
the whole mechanism of production out of adjustment and to 
occasion profits or losses to other entrepreneurs which must in 
time be distributed among all participants. Special obstacles 
prevent certain groups, especially among the labouring popula- 
tion, from getting the full benefit of the influence of competi- 
tion and make their earnings less than they ought economically 
to be. Full account must be taken of these and other influ- 
ences when it is attempted to make practical application of eco- 
nomic theories, as in the later chapters of this book. Not- 
withstanding them, the law of competitive distribution which 
has been explained remains the norm to which actual relations 
tend always to adjust themselves. Its mastery is preliminary 
not only to a thorough understanding of prevailing conditions, 
but to any intelligent effort towards improving those conditions 
as they affect the mass of men. No apology need therefore be 
offered for the prolonged attention which the reader has been 
asked to give to a hypothetical society which, as is freely ad- 
mitted, will never exist outside of the imagination of the 
economist. 

§ 157. Up to this point io the analysis of competitive dis- 
tribution constant reference has been made to the tendency of 
unrestricted competition to cause the prices at which goods are 
sold to correspond to the expense to representative firms of 
producing them. This expense of production has been analysed 
into its elements, rent, w^ages, and interest, and through this 
device these shares have themselves been explained. We are 
now ready to take a somewhat broader view of the relation be- 
tween value and distribution and to recognise that what we 
have styled the expense of production is nothing more than the 



Distribution a Form of Valuation 275 

sum of the values of the goods which co-operate in production 
and that the same general law of valuation runs through every 
stage of the process. 

On the one hand are consumers with certain scales of wants True 
to be satisfied and with certain sums of money to spend on t^tween 
their satisfaction. Their effective demand guides entrepre- the 
neurs in correlating the factors of production, on the other p^JdTc^dcn 
hand, so as to turn out as cheaply as possible those goods and Value 
which can be sold at remunerative prices. The factors of pro- 
duction, land, labour, and capital, are available only in limited 
quantities. The value that is ascribed to the productive serv- 
ices of each piece of land, each workman, and each capital good 
depends upon the contribution it is able to make towards the 
production of those goods for which there is an effective de- 
mand on the part of consumers. Entrepreneurs correlate the 
various factors and through the substitutions and comparisons 
which they make in their efforts to hit upon that combination 
which is economically most efiicient, they determine the divi- 
sion of the value ascribed to the joint products of the factors 
between the factors themselves. In the absence of monopoly 
and of changes which prevent competition from doing its per- 
fect work, the whole value of the products of industry is di- 
vided up between rent, wages, and interest, and the money in- 
comes assigned to those who receive these shares are exactly 
exchanged by them for the very net products in which they 
originate. The exact correspondence between value and the 
expense of production which is found in each branch of produc- 
tion under these conditions is not to be explained on the ground 
that the expense of production determines value. It would be 
more accurate, so far as our analysis has yet proceeded, to say 
that the value of the product itself determines the expense of 
production or the three shares into which such value is divided. 

Value originates in the v/ants of consumers. Only things The Deter- 
which minister either directly or indirectly to the satisfaction shares*^n*^ 
of wants have value. But quite as important as ability to min- Distribu- 
ister to the satisfaction of wants as a condition to value is limi- Complex 
tation of supply. Goods that are superabundant are free. Form of 
Only those whose available supplies fall short of the demand 
for them are valuable. The cause of limitation of supply is to 



276 Value, Price, and Distribution 

be found usually in the conditions of production. In the ab- 
sence of monopoly each branch of production receives through 
the agency of competition its proportion of land, labour, and 
capital. The reason why the services of these factors must be 
; paid for, or have value, ordinarily, is that they are limited in 

supply. Superior land is always so limited. In the United 
States land of inferior quality is still superabundant. Such 
land has in consequence no value and commands no rent. It 
gives rise to a no-rent margin from which the value of the pro- 
ductive services of superior pieces of land may be calculated. 
Skilled labour is limited as is superior land. In the United 
States, as in other countries, the supply of workmen even of 
the lowest grade is insufficient to meet the demand for the pro- 
ductive services which such workmen can perform. In con- 
'sequence the services of such workmen are valuable and 
they can command wages. The supply of capital is also 
limited in comparison with the demand for it. This makes 
the services even of the least efficient capital goods valuable 
and enables their owners to obtain interest for their use. Thus 
at every stage value is the joint result of capacity to contribute 
to the satisfaction of human wants and limitation of the supply, 
and its explanation in the manifestations we have styled rent, 
wages, and interest is no different from its explanation in the 
case of simple consumable goods. 
The Pro- § i^g. The theory of competitive distribution that has been 

Theorjr of explained in this and the preceding chapters is commonly de- 

Distn- scribed as the " productivity theory " on the ground that it 

bution , , . , , . , , ,.~^ 

undertakes to account for the shares assigned to the dirrerent 

claimants by reference to the contributions which they have 
made to production. Although endorsed by many leading 
American and foreign economists, it is not universally accepted. 
Among rival theories, that which undoubtedly holds first place 
is the " exchange theory," ably presented as regards interest, 
or the share of wealth assigned to capital, by the Austrian 
economist, Professor Eugen von Bohm-Bawerk, in his two 
books. Capital and Interest and The Positive Theory of Capi- 
tal. The objections which this distinguished writer urges 
against the productivity theory can best be indicated by a brief 
review of the exchange theory which he himself offers as a 



Interest a Discount on Future Goods 277 

substitute. If it can be shown that there is no real opposition 
between this and the productivity theory, the conclusions of 
both will be strengthened. 

in his explanation of interest, Professor Bohm starts out ^^^^ 
with the entirely just contention that distribution is simply one Theory of 
segment in the completed circle of exchanges by which eco- ^istri- 
nomic relations are controlled in an industrial society in which 
each produces not for himself, but for the market. He applies 
this thought to the interest problem, as follows : the entrepre- 
neur by purchasing the appropriate kinds of capital goods and 
combining them with land and labour may, under normal con- 
ditions, realise a product whose price covers all of his expenses 
and leaves over an interest on the capital invested. Interest is 
thus the difference between the price of capital, or " future 
goods," and that of the products, or " present goods," into 
which they will ripen if managed with ordinary business 
prudence. It will be noted that his characterisation of inter- 
est is different in terms rather than in essence from that 
given in the text. Instead of saying, as v/e have done, that 
capital goods produce present goods worth more than them- 
selves, that is, an interest over and above their own replacement 
fund. Professor Bohm asserts that the present value of capital 
goods is less than is normally the value of the goods into which 
they will be transformed by the process of production. In the 
former case the difference in value is ascribed without any at- 
tempt at analysis to the productiveness of capital goods ; in the 
latter its explanation is sought in the idiosyncrasies of valu- 
ation. 

Pursuing his inquiry, Professor Bohm concludes that the Interest a 
explanation of interest lies in the tendency of men to value ©n Future 
present goods more highly than equivalent future goods and Goods 
that the rate of interest is simply the rate at which men dis- 
count the latter in comparing them with the former.* This ap- 
pears to be a very different proposition from that in the text 
that the rate of interest is the ratio between the value of the net 
products of capital goods and the value of those goods them- 
selves, but if it can be shown that Professor Bohm's rate of 
discount depends, at last analysis, on the productiveness of 
* This tendency was discussed in Section 36, Chapter IV. 



278 



Value, Price, and Distribution 



The 

Exchange 
Theory 
True from 
Viewpoint 
of Lenders 



The 

Sense in 
which 
Capital 
Goods are 
Productive 



capital goods the seeming opposition between the two vie r/s 
will be reconciled. 

In the determination of the rate of interest, as in the deter- 
mination of every other rate with which economics has to do^ 
there are two parties to be considered, lenders or capitalists^ 
who supply capital goods, and borrowers or entrepreneurs, 
who turn them to productive account. The exchange theor})- 
of' interest views the phenomxcnon primarily from the viev/- 
point of lenders. Interest is a premium that is constantl}^ 
offered by the present organisation of industrial society to 
those who will convert their incomes into future goods in- 
stead of present goods, or save and invest instead of spend. If 
men did not discount future goods, all incomes would be saved 
as long as interest could be earned in this way. That this does 
not happen is a sure indication of the truth of the principle 
upon which the exchange theory rests. It is equally obvious 
that whenever and as often as the current rate of interest ex- 
ceeds the rate at which men discount future goods, income 
will be saved and invested and that the tendency in a competi- 
tive society will be for the supply of capital goods to be kept 
at just that level at which the rate of interest and the rate of 
discount are equal. From the side of lenders or capitalists, ac- 
cordingly, the law of interest is that presented by the exchange 
theory. 

The productivity theory is based on a study of interest from 
the viewpoint of borrowers or entrepreneurs. They knov/ 
from experience that capital goods are productive in the sense 
that under the direction of men of average prudence they may 
be made to afford interest. This, as explained in the chapters 
on production, is because roundabout, serial, or capitalistic pro- 
duction yields a larger return in goods in proportion to the 
land and labour used than direct production. Professor Bohm 
recognises this fact in common with other economists, but he 
objects to the hasty inference that because more goods are pro- 
duced by the aid of capital the value of the aggregate product 
is necessarily larger. He points out that increasing the supply 
of any particular good tends to lessen its value and that it is 
even possible, by increasing the supply sufficiently, to remove a 
STOod from the domain of economic calculation altogether and 



The Two Theories Complementary 279 

make it free. May not the larger supply of goods that results 
from capitalistic production be worth actually less than the 
smaller supply obtained by direct production, he asks, so that 
there is actually less than before to distribute instead of more, 
as the productivity theory assumes? The answer to this ob- 
jection is that while multiplying any single product may re- 
duce its exchange value so that the whole supply is worth less 
than before, such a consequence cannot conceivably follow a 
general multiplication of products such as is conceded to result 
from capitalistic production. Exchange value, as has been so 
often pointed out, is the ratio of exchange between goods. 
Multiplying good A or good B may change the ratio as re- 
gards either so that the increased supply is worth less, rather 
than more, than before, but multiplying all goods cannot pos- 
sibly change the ratio so as to make the larger supply of goods 
worth less than was the smaller supply before. The inference 
that the aggregate price to be distributed will increase as the 
aggregate supply of goods increases, or that capital goods are 
productive in the sense that through their use a larger sum of 
value is created, appears therefore to be abundantly justified. 

Armed with the knowledge that capital goods are productive, Exchange 
entrepreneurs try to apportion the supply of capital over the ^y^tiv^tv 
industrial field so that the largest return will be realised. The Tiieories 
comparisons which this leads them to make between different me^itarv 
capital goods and between capital goods and workmen have al- cot Con- 
ready been described, as has the tendency which results from ^*^ '^^ 
these comparisons for the rate of interest to correspond to the 
product economically ascribable to units of capital as contrasted 
with units of labour. From the side of borrowers or entre- 
preneurs, therefore, the productivity theory of interest is as 
valid as is the exchange theory from the side of lenders or 
capitalists. There is no real opposition between them. Rather 
either to be complete must be supplemented by the other, as will 
appear when we come to the discussion of the last phase of the 
productivity theory, that is, the causes which control the sup- 
plies of workmen and of capital goods, and which by so doing 
determine the shares of the product assigned to them respect- 
ively, at the margin of indifference where they come into com- 
parison. 



28o ValuCj Price, and Distribution 



The 
Wages- 
fund 
Theory 



Con- 
clusions 
Drawn 
from the 
Wages- 
fund 
Theory 



§ 159. Another theory in apparent conflict with that which 
has been defended in these pages is the so-called wages-fund 
theory, which at one time enjoyed great vogue in English eco- 
nomic literature. The theory can best be stated in the lan- 
guage of one of the leading works on political economy pub- 
lished about the middle of the last century, that of John Stuart 
Mill. It should be said that Mill himself abandoned the theory 
before his death, but without revising it out of his Political 
Economy. In his chapter, " Of Wages," Mill states that 
" wages, then, depend upon the demand and supply of labour ; 
or, as it is often expressed, on the proportion between popula- 
tion and capital. . . There is unfortunately no mode of express- 
ing by one familiar term the aggregate of what may be called 
the wages fund of a country ; and as the wages of productive 
labour form nearly the whole of that fund, it is usual to over- 
look the smaller and less important part, and to say that wages 
depend on population and capital. . . With these limitations 
of the terms, wages not only depend upon the relative amount 
of capital and population, but cannot be affected by anything 
else. Wages (meaning, of course, the general rate) cannot rise 
but by an increase of the aggregate funds employed in hiring 
labourers, or in a diminution of the number of competitors for 
hire; nor fall, except either by a diminution of the funds de- 
voted to paying labour, or by an increase in the number of 
labourers to be paid." 

In the guarded way in which the theory is here presented no 
particular objection can be raised to it, since it amounts merely 
to saying that wages are for the most part paid out of capital, 
that wages in the aggregate cannot exceed that part of capital 
assigned to wages or the wages fund, and that, consequently, 
the average rate of wages depends upon the proportion be- 
tween the wages fund and the wage-earning population. That 
real wages are, literally speaking, withdrawn from the stocks 
or capital of retail dealers and in this sense " paid out of capi- 
tal " was shown in Chapter IX., Section 89. That wages in the 
aggregate cannot exceed the aggregate fund of goods consti- 
tuting wages is self-evident. Equally incontestable is the 
method proposed for calculating average wages. Unfortu- 
nately advocates of the wages-fund theory rarely contented 



Criticism of the Theory 281 

themselves with these conservative statements. They pre- 
sented the theory as a law of wages and assumed a rigidity in 
the wages fund that would justify the most extreme conclu- 
sions. Thus many of them opposed strikes and other efforts 
on the part of particular groups of workmen to raise their 
wages on the ground that their higher wages, if they did secure 
them, would leave a smaller wages fund to be divided among 
other workmen and would therefore be entirely offset by lower 
wages for other groups. In the same wa}/ they tended to 
exaggerate the dependence of workmen upon capitalists and to 
represent the latter as the greatest benefactors of the race, since 
upon their self-restraint the size of the ail-important wages fund 
depended. Any measures calculated to check ever so little the 
accumulation of capital were vigorously opposed on the ground 
that they menaced the welfare of the whole labouring popula- 
tion. These and other quite unwarranted conclusions have 
stam^ped the wages-fund theory as one of the most pernicious 
errors ever accredited by reputable economists. 

As suggested, the great fault with the wages-fund theory as Criticism 
a law of wages is its assumption that the wages fund is rigid Sl^^^ 
and predetermined. At the time that this idea was advanced 
by English economists there was but a limited importation 
of food and the other goods consumed by the labouring popu- 
lation of England. It followed that, after the crops were 
harvested, the amount of subsistence upon which the whole 
population would have to depend during the ensuing year 
was practically determined. By thinking of wages in terms 
of the staple article of diet of English v^/orkmen of the period, 
wheat, and ignoring the fact that the wheat supply must 
feed others as well as wage-earners, economists succeeded in 
persuading themselves of the existence of a rigid and prede- 
termined wages fund. The assumption was not justified even 
when England imported no food from abroad, because, on the 
one hand, wages, then, as now, included a good deal more than 
food, and on the other it was not the subsistence of workmen, 
only, that was predetermined, but that of the whole population. 
The part of the total food supply which should go to wage- 
receivers was never fixed in advance. It might be increased 
or decreased at the expense of the parts assigned to other 



282 



Value, Price, and Distribution 



Other 
Objections 
and 
Conclusion 



classes. Hence it was quite unwarranted to argue even in 
reference to food that a strike could not improve the condition 
of one group of workmen except at the expense of some other. 
But if the belief that the wages fund was rigid and prede- 
termined was not defensible in England during the second 
quarter of the last century, it is still less defensible for com- 
mercial countries of the present day. At the present time the 
principal articles used for food are produced for the world 
market. No country is limited to its own products, and coun- 
tries like the United States which produce not only most of 
their own food articles, but also for export, have a large re- 
serve on which they may draw at will. Moreover, wages in the 
aggregate consist to a less extent than ever before of mere sub- 
sistence, and most of the articles other than food which work- 
men consume are produced continuously and admit of increase 
or decrease within considerable limits in response to the vary- 
ing demands of the market. It follows that the v^^ages fund 
under present conditions is as elastic as any of the funds with 
which economics has to deal, and no law of wages based upon it 
can throw much light on the causes which really determine 
wages. As was shovi^n in Chapter IX., Section 96, even the fact 
that wages are for the most part paid out of capital loses its 
significance when it is remembered that the products of labour 
are themselves added to capital and that the tendency is for 
these products to exactly replace vv^hat is withdrawn and con- 
sumed and to keep the fund of capital intact. The true in- 
fluence of the supply of capital upon the rate of wages is found 
not in the field of distribution, but in that of production. An 
increase of capital tends to raise wages because it enhances the 
importance of labour as a factor in production. Marginal 
workmen are enabled by such a change to produce more than 
they did before and this, at last analysis, is the reason why 
they earn more. 



REFERENCES FOR COLLATERAL READING 

'^Bohm-Bawerk, Capital and Interest, Book II., and The Positive 
Theory of Capital, Books V. and VI.; * Pier son. Principles of Eco- 
nomics, Part I., Chap. IV.; Mill, Principles of Political Economy, 
Book II., Chap. XL; '''Taussig, Wages and Capital, Part I., and 
Part 11., Chap. XL 



CHAPTER XVI 
VALUE, PRICE, AND DISTRIBUTION {concluded) 

§ i6o. We come now to the last stage in the explanation of Ultimate 

wages and interest, the discussion of the causes that control the ^^tfrmi- 
° ; . nants of 

growth of population and of capital, and by so doing- influence Distri- 

the location of the margin of indifference between them. It °"**^^ 
will be well to preface this discussion by reciting some of the 
facts in reference to the actual increase, during the nineteenth 
century, in the populations of the leading countries of the 
world. 

In Chapter IL, Section i6, a table was given showing the statistics 
growth of the population of the United States from 1790 to p^ 
1900. The remarkable rate of increase, varying from 36.4 per 
cent, in the decade from 1800 to 1810 to 20.7 per cent, from 
1890 to 1900, is, of course, abnormal in the sense that it was 
due in part to immigration. During the same period the popu- 
jbtions of European countries were also increasing, but at a 
much slower rate. Instead of doubling on the average once 
every twenty-five years as did the population of the United 
States from 1790 to 1890, the population of Europe but little 
more than doubled during the whole period.* The following 
table gives in round numbers the populations of the seven prin- 
cipal countries of Europe in 1801 and 1891 v/itli the percent- 
ages of increase :t 

Growth of Population in Etirope, i8oi~i8gi 
(000,000 omitted) 

1801 
Russia in Europe, .... 40.0 
Germany, 
Austria-Hungary, 
France, 

United Kingdom, 
Italy, . 
Spain, . 

* According to the French statistician, Professor Levasseur, 
Mcrease was from 175,000,000 in i8or to 357,000,000 in 1891. 
f From Levasseur; La Population frangaise. III., Chap. VI. 

283 



25.0 
25.0 
26.8 
16.3 

17-5 
6.0 





Increase 


iSgi 


Per Cent. 


93-7 


134 


494 


98 


41-3 


65 


38.2 


.43 


37.9 


133 


30.2 


73 


17.2 


187 


' Levasseur, the 



284 



Value, Price, and Distribution 



Signifi- 
cance of 
these 
Statistics 



Birth, 

Death, and 
Marriage 
Rates of 
Principal 
Countries 



The most interesting fact brought out by the above table is 
the varying rate at which the populations of the different coun- 
tries grew during the period covered. This appears even more 
clearly from statistics showing the rates of growth since 1871. 
Thus from 1871 to 1891 the population of France was prac- 
tically stationary, the population of Germany increased 21 per 
cent., and the population of England and Wales over 27 per 
cent. 

The source of these variations in the rates at which the popu- 
lations of different countries grow is to be sought, of course,. 
in the relation between their birth and death rates and between 
immigration and emigration. For our present purpose we 
may confine attention to the former, since immigration has no 
direct effect upon the population of the world as a whole, how- 
ever much it may affect that of particular countries. 

The following table gives the average birth, death, and mar- 
riage rates* of the principal countries of the world for which 
statistics are available for the years 1871-1890: 



Birtk, Death, and Marriage Rates, iSyi-i8go f 



Austria, . 

Germany, 

Italy, 

Holland, 

United Kingdo: 

Denmark, 

Belgium, 

Norway, 

Sweden, 

Switzerland, 

France, 



m, 



Births 

38.6 

38-1 

37-3 
35-2 
32.6 

31-7 
31.0 

30-7 
29.8 

29.4 
24.6 



Deaths 
30.6 

26.0 

28.6 

22.6 

19.9 

19.0 

21.4 

16.9 

17-6 
22.1 
22.8 



Excess of Births 
over Deaths 
8.0 

12. 1 

8.7 
12.6 
12.7 
12.7 

9.6 

13-8 

12.2 

7-3 
1.8 



Marriagea. 
16.3 

16.4 
15.6 
151 
14.4 
15.2 
14.2 
13-7 
13- 1 
14.7 
15-4 



Comment 
on the 
Table 



The above table emphasises again the great differences that 
are found in different countries. Austria, Germany, and Italy 

show the highest marriage and birth rates, but high death-rates 
in the first and last put them near the bottom of the list as re- 

*That is, the number who are born, who die, and who are married 
for each 1000 of the population ^<?r annum. 

f These statistics are taken irom Ma.yoSm\th., Statistics aftd Soct- 
ology, Book I., Chaps. V., VI., and VII. 



The Malthusian Doctrine of Population 285 

gards the rates at which their populations are growing. The 
countries with the lowest birth rates, France, Switzerland, and 
Sweden, have very diverse marriage and death rates. France 
combines with the highest marriage-rate the lowest birth-rate, 
while in Sweden the relation is just reversed, the lowest mar- 
riage-rate resulting in the highest birth-rate. Even more re- 
markable is the difference in the rates at which the populations 
of these two countries are growing. The low birth-rate of 
France is accompanied by an average death-rate which pre- 
vents the population from increasing as much as 0.2 per cent, 
a year. In Sweden on the other hand the higher birth-rate is 
associated with a very low death-rate which causes the coun- 
try to stand near the top of the list as regards the rate at which 
its population is growing. Such are the facts in reference to 
the growth of population in the principal countries of the 
world. We may now turn to the theories of population that 
have been advanced by economists in their efforts to show that 
these facts obey definite social laws. 

• § 161, The first clearly formulated theory in regard to the The 
growth of population was that advanced by the Rev. T. R. Doctrine of 
Malthus in his Essay on the Principle of Population as it Population 
Affects the Future Improvement of Society , published in 1798. 
Malthus's argument was mathematical in fprm, but so simple 
as to he easily followed. He advanced as too obvious to re- 
quire demonstration the propositions : ( i ) " that food is neces- 
sary to the existence of man," and (2) '' that the passion be- 
tween the sexes is necessary and will remain nearly in its 
present state." From these he proceeded on the basis partly 
of reasoning and partly of observation to the conclusion that 
while food tends to increase only by addition or in arith- 
metical ratio, population tends to increase by multiplication or 
in geometrical ratio. The significance of this contrast he 
makes clear in the following sentences : " Taking the popula- 
tion of the world at any number, a thousand millions, for in- 
stance, the human species would increase every twenty-five 
years in the ratio of i, 2, 4, 8, 16, 32, 64, 128, 256, 512, etc., 
and subsistence as i, 2, 3, 4, 5, 6, 7, 8, 9, 10, etc. In two cen- 
turies and a quarter the population would be to the means of 
subsistence as 512 to 10; in three centuries as 4096 to 13; and 



286 



Value, Price, and Distribution 



influence 

of the 

Doctrine 

on 

Economic 

Thought 



in two thousand years the difference would be almost incal- 
culable, though the produce in that time would have increased 
to an immense extent." " The power of population is," he 
concludes, " indefinitely greater than the power in the earth to 
produce subsistence for man." Population, consequently, 
tends ever to press ahead of the means of subsistence, and is 
only restrained from so doing because without subsistence men 
must perish. In order to keep population within the limits 
fixed by a slowly increasing food supply, nature imposes 
checks which Malthus thought, at first, might be characterised 
either as " vice " or " misery." The lower animals, he saw, 
obey the instinct to propagate without thought of the conse- 
quences, with the result that their numbers are kept down by^ 
" want of room or nourishment " or by their '' becoming the 
prey of others." Man is more prudent and may deliberately 
restrain his impulse to beget and multiply his kind. " This 
restraint," Malthus declared, " almost necessarily, though not 
absolutely so, produces vice." But even with its vicious at- 
tendants, this last restraint is all too weak, he thought, to keep 
population within the necessary bounds. Through an excess 
of births the food supply is rendered insufficient, and misery 
accompanying death through starvation and disease appears as 
another necessary check for man as for the lower animals. 
Malthus's general conclusion was that vice and misery result 
inevitably from the lack of harmony between man's impulse to 
beget and multiply and nature's power to produce food, and he 
justified these evils as the divinely selected means for quicken-, 
ing intelligence and soul in men who might otherwise have no 
stimulus to improvement. 

More mature deliberation, stimulated no doubt by the bitter 
attacks which the publication of his opinions excited, induced 
Malthus to modify his argument in the second edition of his 
Essay (1803). He here recognises that voluntary restraint 
not only need not, but often does not necessitate vice, and that 
it may alone prove an adequate check on population. By this 
qualification the Malthusian theory was changed from a pessi- 
mistic denial of the perfectibility of man to a reasoned appeal 
to men to substitute " moral restraint " as a check on popula- 
"-ion. for the vice and misery which Malthus still deemed the 



Criticism of the Doctrine iSy 

chief means of holding the balance between it and the food 
supply. Notwithstanding these admissions, Malthns himself 
and many of the leading English economists who followed him, 
such as Ricardo and John Stuart Mill, continued to think of 
population as tending constantly to get ahead of the food 
supply. 

The most fundamental criticism to be urged against Mai- Criticism 
thus's reasoning is that he contrasts a purely hypothetical Doctrine 
man with an equally hypothetical nature. Speculating as 
to the rate at which population would increase if un- 
checked is idle when, as a matter of fact, men are never 
unchecked in their begetting and rearing of children. Even 
the lowest savage appreciates the tremendous consequences 
of the sexual function and is to some extent restrained by this 
knowledge. In the same way prophecies in regard to the 
utmost possible increase in the earth's output of food can 
furnish no solid basis for scientific reasoning, because man 
never has and probably never will tax nature to her utmost. 
With all its suggestiveness, therefore, Malthus's method of 
approaching the question predisposed him to arrive at erro- 
neous conclusions. Fie avoided these in large measure in the 
second and later editions of his Essay, but only by giving such 
a different turn to his argument as to deprive it of much of 
its original significance. 

§ 162. Economists are still divided in their opinions in regard Premisses 
to the relative importance of the different influences that con- ^g^^g ^-^.a 
trol the growth of population. In general they may be sepa- abovit 
rated into three groups, according to whether they emphasise ^^^^ ^^'^^^ 
the physiological, the social, or the economic factors which 
enter into the problem. Upon two points all are in substantial 
agreement : ( i ) Illegitimate births constitute such a small pro- 
portion of all births in modern communities that no serious 
error is involved in assuming that a more or less formal union 
precedes the begetting of children. (2) The age of the wife at 
marriage has great influence on the number of children to a 
I family, the general rule being that the older the wife the fewer 
( the children. These two propositions may be accepted as 
^ premisses in all reasoning in reference to the population ques- 
tion. 



288 



Value, Price, and Distribution 



The Physi- 
ological 
Check 



The 

Influence 
of Social 
Customs 



The economists who make prominent physiological con- 
siderations in their discussions of population try to establish 
the general law that the reproductive capacity of animals 
stands in a definite relation to the complexity of their nervous 
organisations. The more highly evolved the organism, the 
smaller, it is contended, is the number of the offspring. Even 
if this theory be true in its application to different orders of 
animals, including man, it remains open to question whether 
the subtle changes which are still going on in man's nervous 
organisation can be shown to influence appreciably his repro- 
ductive capacity. Reasoning from analogy that because men 
beget fewer offspring than lower orders of animals, highly 
developed men and women must be less fruitful than those 
who are less developed is suggestive, but not conclusive. On 
the other hand, statistics of population have not yet been per- 
fected to a point that makes a test of the theory in the light of 
the facts of experience possible. If the theory prove to be 
well-founded it may help to set at rest the fears of modern 
Malthusians who continue to dread the curse of over-popula- 
tion. It must still be regarded, however, as an interesting 
hypothesis rather than as an established principle. 

That the growth of population is controlled by social customs 
and standards was recognised quite clearly by Malthus himself. 
Among primitive peoples customs like that of exposing female 
children at their birth have a direct influence on the growth 
of population and may serve as substitutes for all other checks. 
Marriage customs also have the greatest influence. Other 
things being equal, polygamous marriages are favourable to a 
rapid growth of population. This was clearly recognised by 
the founder of the Mormon Church and was a prominent mo- 
tive for the inclusion of polygamy in that religion, notwith- 
standing the clear prohibition of the practice in the Book of 
Mormon itself. The extension of the practice of monogamy 
tends to restrain the growth of population and has not been 
without influence in preserving European countries from the 
periods of famine that are still not unusual in the Far East. 
Other customs, such as that requiring that the husband shall 
be able to provide a house for his wife, or that the wife shall 
have made with her own hands an elaborate trousseau before 



Influence of the Standard of Living 289 

imarriage, serve to postpone the period of marriage and indi- 
rectly to check the growth of population. As the customs and 
usages of different peoples are all moulded to one common 
standard through international intercourse, the special re- 
straints on population which once acted in particular localities 
will lose their force. Public opinion still controls in large 
measure the conduct of individuals in their marriage relations, 
Ibut its prescriptions are based to an ever increasing extent on 
economic considerations, and this brings us to the third factor 
•controlling population. 

§ 163. The most obvious and certain economic check upon The 
population is that emphasised by all writers since the subject Qtj^ck"*'^ 
began to attract attention, namely the need common to all men 
for food, clothing, and shelter as conditions to continued exist- 
ence. Population is checked by starvation, disease, and death 
as soon as the number of the people reduces the earnings of the 
lowest grade of wage-earners below what is needed to main- 
tain and rear an average family. This " positive check " is 
unfortunately of more than historical interest. Every coun- 
try has its " submerged tenth " of unfortunates who suffer 
habitually from under-nutrition and resulting disease and 
death. As already stated the members of this class are con- 
stantly changing. Those who neither die, nor win their way 
back to the classes from which they descended, are forced in 
time to apply for institutional relief and to enter the still lower 
class of avowed social dependents. It follows that the normal 
tendency of the class is towards self-extinction. It is perpetu- 
ated, if not actually added to, in countries like the United 
States, by the steady stream of recruits that descends to it from 
the higher industrial classes. 

Actual starvation confronts more rarely those belonging to The 
the class of manual workers ( Class 4 in the classification sug- ^ the"'^^ 
gested in Chapter XIII., Section 138), but for them also under- Standard 
nutrition is a possibility which prolonged illness or inability to ° ^vmg 
obtain employment may at any time change into a reality. The 
narrow margin which their usual earnings provide above the 
bare necessaries of life, coupled with their lack of thrift and 
prudence, makes them especially liable, when some temporary 
calamity reduces their incomes, to sink permanently below the 



290 



Value, Price, and Distribution 



A 

Stationary 

Population 



Conditions 
Necessary 
to a l-ow 
Birth-rate 



line of self-support and self-respect. x\t the same time, for 
this class as a whole it is not disease and death, but sacrifices 
induced by the desire to maintain the " standard of living," that 
act as the principal check upon the growth of population. As 
this check acts in about the same way, although not in the same 
degree, on all classes above the very lowest, its influence may 
be discussed in general terms. 

§ 164. The population of a country like the United States is 
divided up into hundreds of different classes, each distinguished 
by special industrial qualities and having a different earning 
capacity from the others. The general law applying to the 
earnings of all classes is that an increase in ttie number of per- 
sons competing for any particular grade of work tends to lower 
the wages paid for that kind of work. The tendency may be 
counteracted by an increased demand for the grade of work 
concerned, or by similar increases in the supplies of workmen 
and of capital goods all along the line unaccompanied by any 
lowering of the margin of cultivation, but in the absence of 
these changes it is always to be reckoned with. As explained 
in Chapter XIII., Section 138, different classes are more or less 
clearly marked off from each other and it is a usual thing for 
children to fit themselves for the grade of work done by 
their parents. In a stationary society the number of work- 
men in each grade would need to be kept constant if a change in 
wages was to be avoided. Children in each grade would need, 
on the average, to just replace those withdrawn by death, or 
the birth-rate for each grade would need to just equal the 
death-rate, if there was to be no reduction in the standard of 
comfort. Although few modern societies are stationary, it 
will be useful to note just what this condition of affairs in- 
volves as regards the habits of a population before passing to 
a discussion of the limitations which are active in a progressive 
society. 

The standard of living has been defined as the " mode of 
activity and scale of comfort v*?hich a person has come to re- 
gard as indispensable to his happiness, and to secure and retain 
which he is willing to make any reasonable sacrifice." From 
the point of view of the growth of population the sacrifice 
which the maintenance of the standard of living may entail is 



A Stationary Population 291 

the postponement of marriage. In the assumed situation this 
sacrifice would have to be incurred to the extent necessary to 
prevent population from increasing at all. Consider how this 
might be accompHshed for any given class in the population. 
As children attain maturity and begin to seek for employment 
they will find the number of desirable positions limited and the 
competition for them severe. This discovery will affect dif- 
ferent ones quite differently. Some in every class will accept 
the best positions they can get, adjust themselves to the limited 
incomes these positions afford, and marry early without much 
regard to consequences. They are likely to have larger fami- 
lies than they can easily provide for and may be so discouraged 
in the struggle that they will fail to maintain their standards of 
living or to give their children as good starts in life as they 
themselves enjoyed. Or, instead of being discouraged by the 
difficulties they encounter, they may only be inspired to put 
forth greater efforts. Marriage is the spur to lagging ambi- 
tion which many young men require, and instead of preventing 
them from attaining the best and highest of which they are 
capable it proves often the very means of helping them to such 
attainment. Such men raise their standards of living rather 
than lower them as their responsibilities multiply, and conceive 
plans for their children that they would have been incapable 
of formulating for themselves. Besides those who marry early, 
there are others with greater prudence who refuse to assume 
the responsibilities of married life until they are well estab- 
lished. By the time such men feel able to marry their inclina- 
tion to do so may have passed, or if they do marry, their fam- 
ilies are likely to be small. Allowing for men and women who 
do not marry at all, for childless marriages, and for infant 
mortality, which is high in even the most advanced communi- 
ties, we may conclude that t?jie prudence and forethought 
of only a part of the members of each class will keep a popu- 
lation stationary, even though a large number are quite 
reckless in their marriage relations.* Great prudence on the 
part of some will serve to offset great recklessness on the part 
of others. 

*The population of France is practically stationary, although three 
children to a family is the average in that country. 



292 



Value, Price, and Distribution 



Causal 

Relation 

between 

the 

Standard 

of Living 

and Wages 

m the 

United 

btates 



Population 

should 
Grow at the 
Top, not at 
the Bottom 



In a progressive society like the United States the conditions 
differ from those just described only to the extent that prog- 
ress permits an increase in population without any lowering of 
the standards of living. If the rate of progress is rapid enough 
standards may be maintained and even advanced at the same 
time that population is growing as rapidly as early marriages 
and large families permit. Under such circumstances the 
power of resistance which the standard of living offers is not 
brought into play at all, and it is more accurate to speak of 
wages as determining the rising standard than of the standard 
as determining the rising wages. Few countries are so favour- 
ably situated as this. Even in the United States, especially as 
regards the higher industrial classes, population has been held 
in check by the standard of living. In periods of great pros- 
perity the tendency is for earnings to increase and for stand- 
ards to rise. The causal relation is from wages to the standard. 
In times of depression the higher standard is maintained and 
serves to prevent the fall in wages that would inevitably follow 
if marriages continued to be as numerous as they were be- 
fore. The causal relation is now from the standard to 
wages. 

Economists have been too much inclined to ignore the psy- 
chological results of marriage in their discussions of the popu- 
lation question. In a progressive community, the fact to be dep- 
recated is not so much a rapidly growing population, as a pop- 
ulation which is increasing more rapidly at the bottom than at 
the top. Early marriages and large families for manual workers 
who are incapable of achieving or even aspiring to any higher 
standard of living than that of their class are socially harmful. 
What is needed by this class is a wider ambition, coupled with 
the prudence necessary to the attainment of the objects which 
it suggests. The higher economic classes, on the other hand, 
suffer not from lack of prudence, but from a lack of sane and 
wholesome desires. Their standards of living are largely arti- 
ficial and for them early marriages and large families are more 
likely than not to prove a benefit by stimulating and giving a 
wiser direction to ambition. Even should the result be a low- 
ering of the earnings of the class to which such individuals be- 
long, the consequence, socially considered, may not be disad- 



Immigration and Emigration 293 

Tantageous, if it does not at the same time lower the earn- 
ings of lower classes. An equalisation of earnings through 
a multiplication of professional and skilled workmen 
and a reduction of manual workers would be highly de- 
sirable. 

A complicating circumstance that makes it difficult, if not The 
impossible, to form any conclusion in reference to the power of ^f Immi^ 
resistance which the standard of living of the manual labour- grationand 
ing class opposes to falling wages, is emigration and immigra- Emigration 
tion. For example, Germany's population continues to in- 
crease at about the same rate decade after decade, and the sur- 
plus is disposed of by emigration without any lowering of the 
earnings of the workmen who remain in the Fatherland. It 
can only be guessed whether population would be checked by 
the standard of living, so that earnings could be maintained, 
should some circumstance close to German emigrants the coun- 
tries to which they are now welcomed. In a reverse way im- 
migration prevents any gauging of the power of resistance of 
the standard of living of America's manual labouring class. 
The steady stream of immigrants with lower standards from 
Europe is a demoralising influence, but the latter have thus far 
been assimilated without any serious decline in earnings. If 
immigration were to cease and a long period of depression 
were to threaten a reduction in the wages of the labouring 
population, it is quite problematical whether the standard of 
living would serve to check marriages and births to the extent 
that would be necessary to prevent such a reduction. 

In the opinion of most contemporary economists the stand- The 
ard of living is an effective means of control over the growth Population 
of population, and the tendency among progressive coun- Controlled 
tries generally is for standards to rise and to insure to standards 
the rank and file of the population ever larger command ^^f Living 
over the material conditions necessary to happy homes and 
happy lives. This opinion must be accepted, if at all, by refer- 
ence to general considerations and to the undoubted fact that 
the real earnings of the manual labouring class are larger than 
at any previous stage in the world's history. The primary 
cause of their improvement has been the improved methods of 
production that have been referred to frequently in these pages. 



The 

Growth 
of Capital 



The 

Growth of 
Wealth in 
the United 
Kingdom 



294 Value, Price, and Distribution 

Rising standards of living have doubtless been a secondary 
cause, since it is highly probable that but for them population 
would have kept pace with the new methods and prevented the 
earning capacity of the bare-handed workman from increasing. 
Before attempting a summary statement in reference to the 
influences controlling the growth of population and through it 
wages, it will be well to consider how the growth of capital or 
wealth is controlled. 

§ 165. As in discussing the growth of population, so in dis- 
cussing the growth of capital, we v^rill begin with a brief study 
of the facts and consider subsequently theories touching the 
causes controlling capital accumulation. Unfortunately statis- 
tics of capital, as distinct from statistics of wealth of all kinds, 
are rarely available, so the economist is forced to content him- 
self with rough estimates. In all progressive countries capital 
appears to be growing at a more rapid rate than population. 
The follov/ing estimates referring to the United Kingdom and 
the United States throw some light on the rate of accumu- 
lation. 

According to the elaborate calculations of Sir Robert Giffen, 
explained in his work on The Growth of Capital, the wealth 
and population of the United Kingdom increased as follows 
from 1845 to 1885 : 









Wealth 




Population 


Wealth 


Per Capita 




(Millions) 


(Million £) 


(£) 


1845 


28 


4,000 


143 


1865 


30 


6,000 


200 


1875 


33 


8,500 


260 


1885 


37 


10,000 


270 



In the 

United 

States 



The increase in wealth from 1865 to 1875 was thus 40 per 
cent, and from 1875 to 1885, 17.4 per cent. The lower rate of 
increase between the latter years is accounted for in part, if not 
wholly, by the decline in prices during that period. 

The statistics of wealth included in the United States census 
reports are believed to be quite untrustworthy as regards the 
gross totals returned, but may be cited as a basis for a com- 
parison of particular items. The following schedule gives the 
estimated total wealth of the country for the year 1890: 



The Growth of Capital 295 

Wealth of the United States in tSgo 
{_$ 1 ,000^000,006) 

Real estate with improvements, 39.5 

Live stock on farms, farm implements and machinery, . 2.7 
Mines and quarries, including products on hand, . . 1.3 
Gold and silver coin and bullion, ..... 1.2 

Machinery of mills, and products on hand, . . .3.1 

Railroads and equipment, 8.7 

Telegraphs, telephones, shipping canals and equipment, 0.7 
Miscellaneous, 7.9 

Total, 65.1 

As the population of the country in that year was some 62,- 
5oo,ooo, the estimated per capita wealth was something over 
$1000 or somewhat less than the estimated per capita wealth of 
the United Kingdom in 1885. 

The growth of wealth is indicated in a very rough way by Growth of 

the following statistics showing the increase, for each decade f>-§.''"icui- 
=' => ' _ tural and 

since 1850, of the value of all farm property in the country Manufac- 

and of the capital invested in manufactures. The last item is n^^^^ 

quite untrustworthy except for the last two census years : 









Capital 






Value of All 




Invested in 






Farm Property 


Increase 


Manufactures 


Increase 




($I,000,000,OCX)) 


Per Cent. 


($1,000,000,000) 


Per Cent 


1850 


4.0 




0.5 




i860 


8.0 


ICO 


I.O 


100 


1870 


8.9 


II 


2.1 


no 


1880 


12.2 


37 


2.8 


33 


1890 


16. 1 


32 


6.5 


132 


1900 


20.4 


26 


9.8 


51 



From these figures it may be inferred that the wealth of the 
country increased from 1890 to 1900 by an increment some- 
where between 26 per cent., the estimated increase in agri- 
culture, and 51 per cent., the estimated increase in m.anufactur- 
mg. As population increased during the decade less than 21 
per cent., the statement that capital grew more rapidly than 
population appears abundantly justified. 

In interpreting these and other statistics of wealth and capi- Necessary 
tal great caution is necessary. Where such statistics have been 
collected by the inventory method, as is attempted in the United 



296 



Value, Price, and Distribution 



Present 

Preferred 

above 

j^uture 

Goods 



Reasons 
for this 
Preference 



States, important items are sure to be omitted while other items 
are sure to be duplicated. On the other hand, where such 
figures are calculated from returns as to incomes from different 
sources, as were Sir Robert Giffen's, figures, errors may arise 
either from inaccuracies in the incomes reported or from mis- 
takes in the method by which the amount of capital giving 
rise to incomes is inferred from the amount of incomes. An- 
other difficulty arises when it is attempted to infer statistics in 
reference to capital from statistics of general wealth. The nor- 
mal effect of an increase in capital is a decline in the rate of 
interest, but this serves itself to increase the value of lands, 
monopolies, and other sources of funded incomes. It follows 
that as capital increases and the rate of interest falls, the ap^ 
parent increase in wealth is likely to be much greater than the 
actual increase in economic goods. Still another source of 
error is in changes in the prices of goods, but enough has been 
said to indicate that statistics of wealth and capital must be 
interpreted with greater caution than any other statistics with 
which economics deals. We have now to consider theories as 
to the causes which control the accumulation of capital or the 
growth of wealth. 

§ 166. Since capital goods owe their existence primarily to 
a willingness on the part of men to postpone consumption or to 
save, the increase of such goods is affected by everything which 
influences this willingness. What, then, are the inducements to 
saving and what the opposing motives for spending? The 
latter have already been considered in Chapter IV., Section 36. 
As was there shown, it is the tendency of men to overestimate 
the importance of the present in comparing it with the future, 
and this leads them normally to prefer present command over 
consumable goods to future command over goods of like kind 
and quantity, present satisfactions to similar satisfactions at 
some future date. 

Four reasons may be assigned for the above tendency : First 
and most obvious is the fact that provision for present necessi- 
ties is the indispensable condition to the continuance of life. 
The shipwrecked mariner who has provided himself with sub- 
sistence for one week has no choice between consuming it this 
week or next month. His present need for food must be satis- 



The Motives to Saving 297 

fied and must loom larger in his consciousness than his need at 
some future time. This fact prevents men from saving that 
portion of their incomes needed for present necessities. Sec- 
ondly, the future is uncertain. No man knows, when making 
provision for the future, that he will live to enjoy it. This was 
summed up in pagan philosophy in the phrase, " eat, drink, and 
be merry, for to-morrow we die." The Christian religion also 
emphasises the uncertainty of life in that it directs men to take 
no thought for the morrow, but to devote their days to pious 
works and the preparation of the spirit for the immortal life to 
come. Either course is obviously unfavourable to the accumu- 
lation of capital. A third reason is found in man's deficiency 
in imagination. Present wants are actually felt, those of the 
future are only imagined. The consequence for the average 
man is an underestimate of the importance of future satisfac- 
tions which makes him unwilling to forego present pleasures 
on their account. Finally, a fourth reason is man's lack of 
resolution or will. Many who have the most vivid imagina- 
tions are, nevertheless, proverbially improvident. This is be- 
cause they have not the strength of character to resist the 
temptations of the present and provide in advance for the 
needs of the future which they so clearly foresee. 

These reasons combined predispose the average man to spend. 
The proportion of his income that he will spend depends in 
a measure on the amount of that income. If it is small, most, 
if not all, must go for present necessities. The poverty of the 
poor is an almost insurmountable obstacle to their ever becom- 
ing rich. Those who are more fortunately situated compare in 
their minds present comforts and provision in advance for 
future necessities, or present luxuries with future comforts. 
With an ample income even the most improvident person is 
likely to make some provision for the future. More prudent 
people are likely to save something though their incomes be 
small. 

The strongest counter-motive to spending is the desire The_ 
to provide for one's self and one's family after old age has savhT^^^^' 
come and earning power has been reduced or has failed al- 
together. This is important because it applies to nearly every- 
one. Its practical consequences are reflected in the vast sums 



298 Value, Price, and Distribution 

which are paid each year in progressive countries as premiums 
to life insurance companies.* Some of these payments secure 
for the family a fixed sum upon the death of the insured. A 
more common form of policy at present, however, is one which 
calls for payment of the principal after a certain number of 
years, even though death has not occurred. This reflects 
clearly the general appreciation of the fact that old age means 
usually diminished earning power. Next in importance to the 
desire to provide for old age as a motive to saving is ambition 
to command social esteem, power, and influence. That 
" wealth is power " of a certain kind is a fact universally ap- 
preciated. Those who covet power at the present day are very- 
apt to seek it through the avenue of wealth accumulation. 
Though less general than the first motive, this is doubtless the 
dominant consideration to those men who acquire the largest 
fortunes. A third motive to saving is the interest which may 
be obtained for the use of capital, which is itself traceable to 
the superior efficiency of capkalistic production. Economists 
have tended to exaggerate this motive in declaring that " inter- 
est is the reward of saving." It is certainly not true that in- 
terest is the only reward or even the chief reward of saving, or 
that the greater part of the saving which now occurs would 
cease if the interest now paid for the use of capital were to be 
withdrawn. Interest is the reward of saving, however, in the 
sense that all those who save under present industrial con- 
ditions may, and as a rule do, receive interest as one of their 
compensations. Furthermore, to some of those who save 
interest is the reward that is chiefly considered, and the rate 
of interest has a determining influence on the amount of in- 
come they are willing to save. A fourth motive to the accumu- 
lation of capital is ambition for business success. Many of 
the men who succeed best in business in the United States seem 
devoid of other ambition. They have become absorbed in the 
game of making money and persist in it because it interests 
them more than anything else, though they have no very clear 
idea to what use they will put their fortunes after they are ac- 
quired. To such men business success is the all-important ob- 

*The annual incomes of such companies in the United States, derived 
chiefly from premiums, exceed $500,000,000. 



Ultimate Determinants of Distribution 299 

ject, and capital is accumulated simply because it is a necessary- 
step towards the attainment of the goal. 

Comparing the four motives inducing men to spend with Progress 
those inducing them to save, we may conclude without argu- ensTl^se 
ment that progress tends to strengthen the latter and to weaken Motives 
the former. The pressure of current needs, the uncertainty of 
life, lack of imagination, and weakness of will are all becom- 
ing less prominent influences shaping the conduct of the aver- 
age man. On the other hand, desire to provide for the family, 
social ambition, willingness to postpone consumption for the 
sake of interest, and ambition for business success seem on the 
increase. These changes are responsible for the tendency al- 
ready described for capital goods to multiply more rapidly 
than population, for the operation of the law of diminishing 
returns as regards capital as a whole, and for the declining rate 
of interest so marked in the United States during the last forty 
years. Some writers go so far as to prophesy that this multi- 
plication of capital goods will continue until the industrial 
world has all of the capital it can utilise and the rate of inter- 
est on safe investments has been lowered to nothing. This 
possibility is considered in the concluding chapter on Economic 
Progress. 

§ 167. In the explanation of distribution that has been given, The • 
great importance has been ascribed to the productiveness of Determ^ 
labour and capital in marginal industries, and it has been stated nants of 
that the location of the margin of production depends upon the ^jq^^ 
extent of the land and natural resources of a country in pro- 
portion to its population and capital. We have just considered 
the various influences that control the growth of population 
and of capital, and we are now in a position to indicate the ulti- 
mate determinants of distribution. 

In the isolated life of a Crusoe economic conduct requires 
an exact balancing of the marginal satisfactions or utilities 
derived from consumption and the marginal sacrifices or dis- 
utilities involved in production. Work should be carried to 
that point at which pleasure ceases to compensate for sacri- 
fices and at that point it should stop. In industrial society 
economic relations are vastly more complex. Marginal utili- 
ties are calculated, not by each individual separately, but 



300 Value, Price, and Distribution 

by groups of individuals. Marginal disutilities include 
not merely effort, but also postponed consumption. They 
also are calculated, not by each individual separately, but 
by groups of individuals, some of whom contribute the 
efforts necesary to production and others the waiting neces- 
sary to the existence of the capital goods indispensable to 
efficient production. In explaining distribution we started with 
the valuations which consumers place upon goods and analysed 
the causes which control the division of the values so deter- 
mined between the factors which co-operate in production. 
But consumers are as a rule themselves producers. Like 
Crusoe, though in a less simple and direct way, they compare 
the utilities of the goods they consume with the disutilities 
connected with the part they play in production. This is not 
true of consumers whose wealth comes to them because they 
control sources of funded income, since such persons make no 
present sacrifices as a condition to securing command over pur- 
chasing power. Nor is it true of consumers who receive inter- 
est for capital they have accumulated, not in order that they 
may secure interest, but in deference to one of the other mo- 
tives that have been described. Such consumers also make 
no present sacrifice in return for the purchasing power they 
receive. Nor is it true of workmen who find their work 
a pleasure and whose hours are fixed not by calculations 
of marginal disutility which they themselves make, but by 
standards determined by the weaker members of the indus- 
trial groups to which they belong.* It is true, however, of 
capitalists who are just induced by the promise of the current 
rate of interest to save and invest in preference to spend- 
ing. Such men balance the marginal utilities of the goods 
which the interest will enable them to command against the 
marginal disutility of deferring consumption. It is also true 
of the marginal workmen in each group who determine by 
their calculations the length of the working day for their class. 
For them the marginal disutility of the final hour's labour is a 
painful reality which they balance in their minds against the 

* For example, many a mechanic who limits his work to eight hours a 
day, would gladly work an additional hour for proportionate pay, but is 
prevented from so doing by loyalty to the rule of his union. 



Utilities and Disutilities 301 

added goods which the pay for this last hour enables them to 

command. If the balance is on the negative side they are ripe 

for a strike for a shorter working day, and if their feelings are 

the feelings of their group they are likely to secure it. 

Besides the calculations which determine the accumulation of Th^ 

Balancing 
capital and the length of the normal workmg day, there are of Utilities 

others which fix standards of living and through them con- gg^^jj^ties 
trol, perhaps, the rate at which the working population in- 
creases. To maintain wages men in different industrial groups 
incur the sacrifices involved in a postponement of marriage, and 
in the long run these sacrifices are compensated, and only just 
compensated, so far as the standard of living controls wages, 
by the higher earnings which such conduct insures to the class 
benefited. 

A full analysis of the motives that enter into the balancing 
of utilities and disutilities in industrial society, and of the 
equilibrium that results from them, belongs to a more advanced 
treatise on economics. Such a balancing is one of the condi- 
tions to the realisation of the hypothetical state of normal equi- 
librium to which reference has so frequently been made in 
previous chapters. In actual progressive societies changes 
occur so frequently that the exact balancing of utilities against 
disutilities is something constantly aimed at, but never secured. 
In men's efforts to realise it, the ultimate determinants of 
values and distribution are, nevertheless, to be sought. 

REFERENCES FOR COLLATERAL READING 

* Mayo-Smith, Statistics and Sociology, Book I., Chaps. V., VI., and 
VII., and* Statistics and Economics, Book I., Chap. V.; Giffen, The 
Growth of Capital; *Clark, The Distribution of Wealth, Chap. 
XXIV.; ^Marshall, Principles of Economics, Book IV., Chaps. IV. 
and VII., Book VI., Chap. XI.; Nicholson, Principles of Political 
Economy, Book I., Chaps. XI. and XII.; Bohm-Bawerk, The Ulti- 
mate Standard of Value (article in Annals of American Academy of 
Political and Social Science, Vol. V. pp. 149-208); *i^^/'/<fr, Principles 
of Economics, Chap. 43. 



CHAPTER XVII 

MONEY AND THE MONETARY SYSTEM OF THE UNITED 

STATES 

The Dis- § i68. As has already been pointed out,* every extension of 

of Barter '' co-operation and the division of labour, beyond the simple divi- 
sion of tasks possible vi^ithin the family, must be accompanied 
by a corresponding development of the system of exchange. 
The simplest kind of exchange is barter ; but this has serious 
drawbacks, since it can take place only when two traders come 
together, each having in his possession a commodity preferred 
by the other. Even this unusual situation will not lead to an 
exchange unless the parties can agree as to the terms of the 
bargain. Thus, under the system of barter, the American In- 
dian with a pony to dispose of had to wait until he met another 
Indian who wanted a pony and at the same time was able and 
willing to give for it a blanket or other commodity that he 
himself desired. Even v/hen pony and blanket came to- 
gether an exchange through barter might be prevented by the 
fact that one of the owners thought his commodity worth some- 
what more than that of the other. Neither pony nor blanket 
could be divided, and in consequence higgling over the trade 
would be quite as likely to lead to a quarrel as to a transfer 
of property. 
The Nature The inconveniences connected with barter led, at an early 
tions of"*^' period in the history of civilisation, to the introduction of a 
Money medium of exchange, or money. Although no exact account of 

the steps preceding this important innovation has been pre- 
served, it is not difficult to reconstruct in imagination the cir- 
cumstances which determined the choice of the medium of 
exchange and caused it gradually to come into general use. 
Inability to barter surplus products for the exact commodities 
i desired must have suggested the feasibility of bartering them 

* Section 77, Chapter VHI. 
302 



The Functions of Money 303 

for other prodiKts that were in more general demand, more 
durable, or for some other reason more exchangeable than the 
former. Thus the owner of surplus game who was unable to 
get for it the arrow-heads he desired, would be glad to accept 
instead some durable ornament generally prized in the com- 
munity, such as a string of beads. His chance of exchanging 
the latter for arrow-heads would be excellent, and would 
certainly be preferred to the prospect of having his game spoil 
on his hands. In some such way commodities would come to 
be distinguished even in primitive communities by reference 
to their exchangeability, and the most exchangeable commodity 
would gradually come into use as a medium of exchange. 

Quite as important as a medium of exchange to the develop- Money a 
ment of an industrial community is a standard, or common de- of "vahie 
nominator, by means of which the values of commodities may 
be compared. Without such a standard the value ratio between 
each commodity and every other commodity must be remem- 
bered by the trader. For example, if he deals in ten commod- 
ities there will be forty-five ratios of exchange to be remem- 
bered, and these will increase by multiplication to 1225 if he 
deals in as many as fifty commodities. The use of a standard 
of value enables the trader to substitute for the forty-five possi- 
ble exchange ratios in the first case, the nine ratios between 
the value of the selected commodity and the values of the 
others, and in the second case for the 1225 possible exchange 
ratios, 49 ratios. The smaller number of ratios under the 
new system tell exactly the same story as the larger number 
did before. Thus, instead of remembering that a string of 
beads is worth four deer, that two deer are worth an arrow- 
head, and that two arrow-heads are worth a string of beads, 
it suffices for the trader to remember that a deer is worth 
one-quarter, and an arrow-head one-half of a string of beads. 
To serve as a standard or common denominator of value is 
a second function of money, and to fulfil it, as to fulfil the 
first, the commodity selected for the purpose must possess in 
high degree the quality of exchangeability. 

In addition to serving as a medium of exchange and a stand- Also of 
ard for comparing exchange values, money, or the monetary Payments 
unit, serves in modern industrial communities as the medium 



Prices and 
the Value 
of Money 
Vary 
Inversely 



Stability 
of Value a 
Desirable 
Attribute 
of Money 



Various 
Commodi- 
ties Used 
as Money 
in the Past 



304 Money and the Monetary System 

for credit transactions or deferred payments. Promises to 
pay in the future for value received in the present are habitually 
expressed in terms of money. To serve as a standard for de- 
ferred payments is thus money's third function. 

§ 169. Price, as already explained, is exchange value meas- 
ured in terms of money. In the United States and other 
gold-standard countries prices express the value ratios between 
the commodities priced and gold. To say that a bushel of 
wheat is worth $1 is to say that a bushel of wheat will ex- 
change for 23.22 grains of pure gold, since the latter is the 
standard dollar of the country. If the price of wheat should 
rise to $1.25 (i. e., to 29.025^ grains of pure gold), the value 
of gold measured in terms of wheat will have fallen correspond- 
ingly. One dollar, or 23.22 grains of gold, will now exchange 
for only four-fifths of a bushel of wheat. Thus every change 
in price registers a corresponding change in the exchange value 
of gold measured in terms of the commodity priced. To deter- 
mine with certainty whether any given change is due to a 
change in the value of the commodity, or in the value of gold, 
the standard money, it is necessary to make a general compari- 
son in which all important commodities are included for the 
two periods. If in the given case it should be found that while 
the price of wheat rose other prices remained constant or fell, it 
might fairly be concluded that the value of gold had not fallen 
and that the change was due to a rise in the value of wheat. 

Some writers describe money as the measure of values, but it 
is evident that it is not a measure to be compared with a foot- 
rule or a bushel. It is a convenient standard for comparing 
values or a common denominator to which ail values may be 
reduced ; but as a measure of values in any absolute sense it 
is untrustworthy, since it is itself variable in value. This 
variability is a source of annoyance and loss to the business 
community, and hence, as explained in the next section, sta- 
bility of value is one of the qualities essential to a good money. 

§ 170. Present-day monetary systems are the result of an 
historical evolution. In the past, in different countries, nearly 
every kind of commodity has served as money. The ox is the 
standard of value referred to in the earliest literature of Greece 
and Rome. In Africa cubes of salt have been used. Tea 



Qualities of a Good Money 305 

was used at one time in parts of Asia. In America the In- 
dians used strings of beads, which they called wampum, 
and for a time wampum was also used for small payments 
lietween the colonists in New England. In Virginia tobacco 
long served as the standard of value, and efforts were made to 
fix by law the value ratio between it and the coins which found 
their way to the colony from Europe. As a result of experi- 
ment, all civilised countries have now come to the use of the 
metals as money, and all of the more important commercial 
countries have fixed upon gold as their standard and relegated 
other metals to a subordinate position in their monetary sys- 
tems. The reasons for the preference for gold become clear 
from a consideration of the qualities which should be possessed 
by a good money. 

Economists quite generally agree that the commodity Qualities 
selected to serve as money should have the following qualities : ^ Good 
(i) value, (2) durability, (3) portability, (4) homogeneity, Money 
(5) divisibility, (6) cognisability, and (7) stability of value. 
That the commodity which is to serve as the intermediary be- 
tween valuable things must itself have value is obvious. Dura- 
bility is important because after each exchange transaction the 
medium of exchange must remain for a longer or shorter time 
in the possession of the seller. Unless it is durable, it will 
depreciate during this interval to the seller's loss. This con- 
sideration precludes the use of perishable articles as money and 
accounts for the world's preference for the precious metals, 
which are as durable, when alloyed with copper, as anything 
known to man. Portability is indispensable to the convenience 
of a medium of exchange. Other things being equal, the com- 
modity which compresses the greatest value in the smallest 
bulk is the most economical medium of exchange for large 
transactions. In this respect gold is superior to silver and this 
accounts in part for the preference for it of leading commercial 
nations. Homogeneity and divisibility are related qualities, 
since together they insure that the commodity used as money 
may be divided and subdivided without loss in value. These 
qualities also distinguish the metals. Cognisability is impor- 
tant as it renders difficult the circulation of counterfeit money. 
One objection to silver is the resemblance to it of the baser 



3o6 Money and the Monetary System 

metals lead and tin. The last quality, stability of value, is 
essential in connection with the function which the monetary- 
unit performs as a standard of deferred payments. In the ab- 
sence of such stability creditors and debtors have no guarantee 
that the contract between them calling for the payment of a 
certain sum of money at a future date vv?ill involve the return 
of a value equivalent to that loaned. If the value of monejr - 
rises in the interval the debtor will be injured, if it falls the 
creditor will receive less than he anticipated. Either event 
must discourage transactions involving such an uncertain ele- 
ment, and it is for this reason that the importance of stability 
of value in the commodity which is to serve as money can 
hardly be exaggerated. As regards this quality also the 
precious metals have a marked superiority over most other 
things. The demand for them is very elastic because they 
serve such a variety of different purposes. They are highly 
prized as ornaments, they are used in watch-cases, family plate, 
etc., as badges of social position ; they serve important indus- 
trial uses in connection with dentistry, etc., and finally they are 
now so widely used as money that the monetary demand for 
them is large. On the side of supply the conditions are equally 
favourable to stability of value. Because they are precious 
and at the same time durable, the greater part of the totaE 
quantity produced, at least in m.odern times, has been preserved 
and is still available to satisfy current needs. In proportion 
to the total stock (estimated in the case of gold at $10,000,000,- 
000) the addition to the supply due to production each year is 
insignificant. The supply is thus practically constant over 
short periods and is little affected by variations in the annual 
output of the world's mines. Elasticity of demand and con- 
stancy of supply, the conditions favourable to stability of value, 
are thus presented by the precious metals as by no other com- 
modities. As regards these characteristics there is, perhaps, 
little to choose between gold and silver. The world's prefer- 
ence for the former must be explained chiefly hy its higher 
value in proportion to its bulk and its readier cognisability. 

§ 171. The choice of the medium of exchange and standard 
of value was a subject which early engaged the attention of 
organised governments. They did cot create the monetary 



Coinage and the Printing of Paper Money 307 

systems that are found to-day, but they gave them a legal sane- The Role 
tion which has added materially to their efficiency. Laws at ^.^^f^^pj^^ 
present control the monetary systems of civilised countries in in Connec- 
two vital respects : they declare what forms of money shall j^q^Z^^ 
be a legal tender, that is, shall be accepted in legal pay- 
ment of all obligations calling for money, either betv/een indi- 
viduals or between the state itself and its subjects, and they 
determine the conditions under which these forms of money 
and other media of exchange that serve the convenience of the 
business community shall be manufactured and put into circu- 
lation. 

The manufacture of metallic money is called coinage and Coinage 
has become a government monopoly in all advanced countries, Printing 
for the simple reason that this has been found by experience to of Paper 
be the only means by which a perfectly reliable coinage system 
can be maintained. At first coining consisted merely in stamp- 
ing the head of the sovereign and an indication of the weight 
of the coin on one of the faces of a flat disc of metal. So long 
as this only was done, it was necessary at every transaction to 
weigh the pieces of money offered in exchange to make sure 
that they had not been " clipped " since leaving the mint. This 
necessity was obviated by the second step in the progress of 
coinage, which was to stamp the reverse face of the disc of 
metal. A third step consisted in " milling " the edges of the 
coin and thereby rendering it impossible to clip it without de- 
tection. At the same time that these improvements in the 
process of coinage were made, stringent regulations were 
passed forbidding the clipping and " sweating " of coins, and 
requiring those having in their possession coins whose weight 
had been reduced below a certain standard to return them to 
the mint, so that they might be remelted and reissued at full 
weight. Withdrawing the character of legal money from 
" light " coins has proved a simple and efTective method of 
enforcing the latter provision. In addition to coins, most 
modern governments issue one or more forms of paper money. 
Although devised originally as a means of securing revenue 
for hard-pressed sovereigns, such money, on account of its con- 
venience, has won for itself a permanent place among the media 
of exchange preferred by intelligent business communities. 



3o8 Money and the Monetary System 

Printing and engraving paper notes have thus become as 
important a function of government as minting coins, and 
quite as great progress has been made in manufacturing notes 
that are at once durable and so cognisable as to defy the inge- 
nuity of counterfeiters. 
Standard, In the monetary systems of most modern states three dif- 

Credit' ferent kinds of money may be distinguished, i. e., standard, 

Money token, and credit money. Standard money is that to the value 

of which the values of all other kinds of money in circulation 
are adjusted. It may be self-regulating, as when the law de- 
clares that a certain weight of the metal selected for the stand- 
ard shall constitute the standard coin and pennits all persons 
bringing such metal to the government mints to have it con- 
verted into coin either gratuitously or on the payment of a 
small fee, called seigniorage. This system is designated " free 
coinage," and has been adopted by all the more important com- 
mercial nations. Alternative to it is the system of " fiat " 
money, that is, money issued on the authority of the govern- 
ment and made to circulate by being declared a legal tender. 
Such money is usually accepted at the outset with some mis- 
givings, but after a time people become accustomed to it, and if 
the amount issued is controlled so that there are no violent 
changes in the value of the monetary unit, it may serve nearly 
as well for ordinary transactions as self-regulating money. 

Token money is money which is issued for use as small 
change in connection with minor transactions. It is usually 
made of a baser metal than the standard and put out in just the 
quantity that suits the convenience of the business community. 
Credit money supplements standard, and is issued on the credit 
of the government. It is redeemable in standard coin on de- 
mand, and differs from token money in that it is designed to 
serve as a medium of exchange for large as well as small trans- 
actions. As business communities learn to appreciate the 
superior convenience of paper money, the field for credit money 
steadily widens. In the United States a stage has already been 
reached where credit and token money constitute, with credit 
substitutes for money such as checks and drafts, practically the 
entire medium of exchange of the country. 
§ 172, From early times governments have struggled to keep 



Gresham's Law 309 

different kinds of money in concurrent circulation. The ill sue- Gresham's 
cess of such efforts led in the sixteenth century to the formula- ^^^ 
tion by Sir Thomas Gresham, one of the advisers of Elizabeth, 
of the principle known as Gresham's Law. This is to the effect 
that when two or more kinds of money circulate concurrently, 
that kind the material of which is most enhanced in value by 
being given monetary form tends to drive out of circulation 
those kinds the materials of which have been less enhanced or 
unchanged in value by being given monetary form, that is, 
cheaper tends to drive dearer money out of circulation. This 
seems very like asserting that poor money tends to drive out 
good and needs careful explanation. 

An illustration will help to make clear the reasons back of An 
Gresham's Law. In 1792 the Congress of the United States 
passed a coinage law adopting the bimetallic system. Both gold 
and silver dollars were made full legal tender, and the Secre- 
tary of the Treasury was instructed to coin both metals freely 
for all applicants, and to put fifteen times as much silver into the 
standard silver dollar as he put of gold into the standard gold 
dollar. This is conveniently expressed by saying that the law 
provided for a mint ratio of 15 to i. Some time after this act 
went into effect the market or commercial ratio between silver 
and gold became IS/-^ to i, i. e., in the bullion markets of the 
world 15;^ ounces of silver exchanged for one ounce of gold. 
The situation then was that our mint coined bullion into money, 
making fifteen ounces of silver the equivalent of an ounce of 
gold, while in the world's market an ounce of gold was equiva- 
lent to 15/^ ounces of silver. Silver coin was made by law 
just as good money as gold within the limits of the United 
States, and was therefore the cheaper medium for the payment 
of debts within the country. According to Gresham's Law it 
should have driven gold out of circulation, and this it did, in 
fact, as soon as the situation was understood. Since an ounce 
of gold would buy fifteen and a half ounces of silver abroad, 
v^hile the American mint would give to fifteen ounces of silver 
the same monetary power that an ounce of gold enjoyed, it 
was profitable to export gold coin, exchange it for silver bullion, 
import the latter, and have it converted into the overvalued 
silver money. For this reason such gold as was coined was 



Gresham's 
Law and 
the Present 
Monetary 
System of 
the United 
States 



The 

Adoption 
of the Gold 
Standard 
in Europe 



310 Money and the Monetary System 

withdrawn from circulation, and the country was brought to 
the cheaper silver standard. 

The above demonstration of Gresham's Law may seemi to 
prove too much. If silver drove out gold after 1792, why, it 
may be asked, does it not now drive out gold, and why does not 
paper money drive out both gold and silver ? The reason is not 
far to seek. Gresham's Law describes a tendency. After 1792 
that tendency was quickened into active life because the free 
coinage of silver opposed no obstacle to the substitution of the 
cheaper for the dearer money, so long as any of the latter re- 
mained in circulation. To-day the tendency is dormant because 
the quantity of silver and paper money put into circulation is 
rigidly limited, and is far from sufficient to meet the monetary 
needs of the country. This cheaper money, at the time it was 
first issued, did drive out gold ; but obviously it could not 
drive out more dollars than it could itself replace. The limita- 
tion on its supply permits some gold to remain in circulation. 
Gresham's law still operates, however, as every bullion broker 
knows, when gold is to be exported, for at such times great 
pains are taken to select only full-weight coins for shipment. 
Any circumstance which should increase the volume of silver 
or paper money in circulation or reduce the country's need for 
money, would serve to increase the exportation of gold coins, 
and, if persistent, might cause light as well as full-weight coins 
to be withdrawn until no gold was left in circulation. 

§ 173. In adopting the bimetallic system in 1792 the United 
States simply fell in with the general practice of European 
nations. That system has since been given up, as the result of 
the conviction impressed upon one country after another that 
gold and silver cannot be kept in concurrent circulation at any 
arbitrarily established mint ratio. England was one of the 
first countries to arrive at this conclusion, having adopted the 
single gold standard in 18 16. On the continent the strugg'Ie 
to maintain a double standard was continued until the third 
quarter of the last century. Finding it difficult to keep both gold 
and silver in circulation at a parity without the co-operation of 
other nations, France and some of the other states of Southern 
Europe established in 1865 the so-called Latin Union, which 
had this for one of its principal objects. From 1803 to 1873, 



The Adoption of the Gold Standard 31 1 

France and the Latin Union succeeded in keeping both gold 
and silver in circulation at their established mint ratio of i to 
I57<. During the entire period the market ratio between the 
two metals varied * but slightly from this mint ratio. In 1873 
several circumstances united to compel France to abandon the 
policy which she had so long upheld. Chief among these was 
the increased production of silver, due to silver discoveries in 
[America, which lowered the value of that metal and caused its 
substitution on a large scale for the country's dearer gold coin. 
Seeing their gold disappearing from circulation and fearing 
that they would be brought to the cheaper standard, the coun- 
tries of the Latin Union decided in 1874 to limit the coinage of 
silver, and in 1878 to close their mints altogether to the free 
coinage of that metal. By this action they maintained their 
dearer standard, which was thenceforth gold. About the same 
time (1871-73), Germany adopted the single gold standard by 
limiting the coinage of silver so that the silver money in circu- 
lation should never exceed ten marks per capita. Holland, 
Norway, Sweden, and Denmark were not slow to follow the 
example of their southern neighbours. More tardily Austria- 
Hungary (1892-1902) and Russia (1896), which for several 
years had had depreciated paper currencies as their chief media 
of exchange, accumulated sufficient gold to establish securely 
the gold standard. Thus at the end of the nineteenth century 
all of the important nations of Europe except Spain had the 
gold standard in actual operation. 

Outside of Europe a similar development was in progress Its 
during the same period. The British dependencies, Canada, Outside'of 
Cape Colony, and the States of Australasia have long been on Europe 
the gold basis. India suspended the free coinage of silver in 
1893, and by 1899 had accumulated enough gold in London to 
maintain the silver coin, which continued to be the principal 
medium of exchange of the country, at a fixed parity with the 
gold coinage of England ( 15 rupees ==: £1). Gold thus became 
the country's real standard of value. Japan adopted the single 
gold standard in 1898. At the close of the nineteenth cen- 

* The extreme variations were from a ratio of i to 16^ in 1813 to a 
ratio of i to 15.19 in 1859. Of- Shaw, T/ie History of Curre}tcy, 12^2 
to i8g4, p. 159. 



Monetary 
History of 
the United 
States 



312 Money and the Monetary System 

tury only China and Mexico, among the important nations of 
the world, remained on the silver basis, and at the time of writ- 
ing (July, 1903) even these countries are taking measures to 
establish a fixed parity between their silver currencies and gold 
in some such manner as did India in 1899. When these meas- 
ures become effective gold will be the standard of value of 
the entire commercial world. 

§ 174. As already explained, the first coinage law of the 
United States gave the country a mint ratio so unfavourable to 
gold that silver became in time its actual standard of value and 
medium of exchange. It was not until 1834 that Congress at- 
tempted to change this situation. In order to bring gold back 
into circulation, acts were passed in that year and in 1837 estab- 
lishing the present mint ratio between gold and silver, which 
is I to 15.988.* The standard silver dollar was to contain 
371.25 grains of pure silver as under the act of 1792, and the 
standard gold dollar 23.22 grains of pure gold. Both were to 
be 9-10 fine. This new ratio undervalued silver nearly, if not 
quite, as much as the former had overvalued it, since the com- 
mercial ratio between gold and silver continued to be about i 
to 153^. In obedience to Gresham's Law, silver now disap- 
peared from circulation and gold became the real standard of 
value of the country. This situation continued down to the 
time of the Civil War. During that struggle United States 
notes or greenbacks were issued in excessive quantity, with the 
result that gold also disappeared from circulation and the coun- 
try was brought to a paper standard. Thus when the war closed, 
and for some years thereafter, neither gold nor silver, except 
the subsidiary coin used for small change, was in circulation. 
In 1873, after considering the subject during successive ses- 
sions, Congress passed a law omitting the standard silver dollar 
from the list of authorised coins. At the time this action at- 
tracted little attention, but a few years later, when the question 
of resuming specie payments was under consideration and silver 
producers were suffering from the decline in the gold price of 
their product, there arose a violent agitation for the remoneti- 
sation of silver. In 1878 Congress passed what is known as 
the " Bland-Allison Act," which reintroduced the silver dollar 
* The " 16 to I " of recent campaign arguments. 



The Gold Standard Law 313 

and required the Secretary of the Treasury to purchase monthly 
from $2,000,000 to $4,000,000 worth of silver bullion and coin 
it into standard dollars. The gold price of silver continued to 
fall, and this led in 1890 to the enactment of a second law, 
known as the " Sherman Act," which required the Secretary of 
the Treasury to purchase monthly 4,500,000 ounces of fine 
silver so long as the market ratio between silver and gold 
should be less favourable to silver than the mint ratio, and to 
pay for it by the issue of so-called Treasury notes redeemable 
in coin and possessing full legal-tender power. 

As a result of the Bland- Allison and Sherman Acts, 554,000,- The Gold 
000 silver dollars were coined in the United States from 1878 l,^ ^^ 
to July I, I9C'3. Of these, less than 75,000,000 have ever been 
in circulation because of the awkwardness of the silver dollar 
as a medium of exchange. The remaining dollars have been 
represented by silver certificates, redeemable in silver dollars 
on demand. The consequence of this large increase in the silver 
currency of the country was to cause gold to be withdrawn from 
circulation. This tendency became so marked after the passage 
of the Sherman Act that serious fears were entertained lest the 
gold standard, which had been re-established January i, 1879, 
should be displaced by a cheaper standard. In March, 1893, a 
special session of Congress was called by President Cleveland 
for the sole purpose of repealing the purchase clause of the 
Sherman Act, v/hich was finally done in October of that year. 
After much further agitation, the logical sequence to this policy 
followed on March 14, 1900, when Congress passed a law 
definitely affirming that gold is the standard of value of the 
country. 

§ 175. On July I, 1903, there were in general circulation in Present 
the United States eight different kinds of money. The amounts Sv°s°em^(^ 
of each kind in circulation and in the Treasury, as shown by the United 
the statement of the Secretary of the Treasury for that date, 
were in round numbers as follows : Gold coin and bars, $1,253,- 
000,000; (gold certificates, $379,000,000) ; standard silver dol- 
lars, $554,000,000; (silver certificates, $455,000,000) ; subsidi- 
ary coin, $102,000,000; Treasury notes, $19,000,000; United 
States notes, $347,000,000; national bank notes, $414,000,000. 
The gold and silver certificates are placed in parentheses 



Gold Coin 
Kept at a 

; Constant 
' Parity in 
' Value with 

Gold in 

Coin 



314 Money and the Monetary System . 

because they stand for gold and silver included in the first and 
third items. The total money supply of the country was, there- 
fore, $2,688,000,000, of which $312,000,000 was held in the 
United States Treasury as assets of the Government. This 
represented an estimated circulation per capita of $29.39. 

As already stated, it is the monetary policy of the United 
States to maintain an exact parity between the value of its gold 
coin and the value of the gold in such coin and between the 
value of gold money and the seven other varieties of money 
enumerated. How this is effected will now be explained. The 
value of gold coin is prevented from exceeding the value of 
the gold in such coin by the policy of free and gratuitous gold 
coinage. Anyone who has gold in any form may take it to 
the mint and have it converted into coin free of charge. He 
need not even wait for the process of coinage to be completed, 
as the Treasury issues gold certificates for bullion left on de- 
posit. In fact, the policy of the Government towards owners 
of gold bullion in any form is so liberal that practically the 
entire product of the gold mines of the country is now sent to 
the Government assay offices or Government mints to be con- 
verted into commercial bars or standard coins. This free 
convertibility of bullion into coin prevents gold coin from ever 
becoming more valuable than its gold contents. Any tendency 
in this direction is promptly checked by a multiplication of coins 
and a reduction of the gold supply in other forms. 

Gold coin is prevented from becoming less valuable than the 
gold it contains by the simple fact that it may be diverted with 
little loss to any other use for which gold is adapted. It is 
always potential bullion, and is treated as actual bullion to be 
thrown into the melting pot, exported, or dealt with in any 
other way that seems desirable whenever its bullion value 
exceeds ever so slightly its coin value. Free and gratuitous 
coinage on the one hand and the ever-ready melting pot on 
the other, are thus the influences which maintain the constant 
parity between the value of gold coin and the value of its gold 
contents, 

§ 176. The maintenance of the parity between gold and the 
other varieties of money is a more complicated matter. Gold 
certificates are kept at par by the fact that they are redeemable 



The Gold Reserve , 315 

at the pleasure of the holder in the gold coin in exchange for How the 
which they are issued, and which is held in the Treasury ^^"^Jq^^^ 
as a trust fund. Standard silver dollars, which, like gold and Silver 
coin, possess full legal-tender power, are kept at a parity Maintained 
with gold because they, too, are freely exchangeable at the 
United States Treasury for gold or any other form of money 
that is desired. There is no law expressly requiring their re- 
demption in gold, but laws have over and over again affirmed it 
to be the s.ettled policy of the United States to maintain a parity 
between its gold and silver coins, and prompt redemption of 
one in the other has long been recognised as the only sure v/ay 
of maintaining such parity. The ability of the Secretary of 
the Treasury to pay out gold in exchange for silver depends, 
of course, upon the limitation of the amount of the latter that 
is put into circulation. As the law now stands, no more new 
silver dollars may be coined than will suffice to redeem the 
$19,000,000 in Treasury notes still outstanding, and there is 
little doubt that the quantity thus authorised, circulating for 
the most part as silver certificates, will be continuously needed 
for the country's retail trade. So long as this limitation is 
adhered to, the redemption of silver dollars is not likely to 
cause the Government any embarrassment. Minor coins are 
kept at a parity with gold because they also are redeemable in 
standard coin, and because there is a constant demand for the 
limited quantity of such coins issued. 

The United States notes and the Treasury notes of 1890, History of 
although so different in their origin, are now on the same foot- grates 
ing so far as their monetary use is concerned. Both are a legal Notes 
tender and both are now redeemable in gold. The United States 
notes or greenbacks, which were issued in excess during the 
Civil War, were restored to a parity with gold by the resump- 
tion of specie payments, January i, 1879. The amount of this 
currency, which was at one time nearly $450,000,000, had been 
reduced to $346,681,016 by May 31, 1878, when an act,' which 
is still in force, requiring this quantity to be kept in circulation, 
Ibecame effective. 

After 1890, when the excessive issue of silver currency The Gold 
threatened to deplete the country of its gold, the United States 
notes were the convenient means used by bankers to secure 



National 
Bank Notes 



Stability of 
the Gold 
Standard 



The 

Limping 
Standard 



316 Money and the Monetary System 

that metal from the Treasury. As, at the same period, the Gov- 
ernment's revenues were insufficient to meet its current require- 
ments, the Secretary of the Treasury was compelled to pay out 
the notes almost as fast as they were redeemed, and this permit- 
ted their repeated use for the same purpose. The act of March 
14, 1900, was designed to prevent the recurrence of a similar 
situation. It provides for a special gold reserve of $150,000,000 j 
to be set aside by the Secretary of the Treasury for the exclii- '^ 
sive purpose of redeeming on demand United States notes 
and Treasury notes. The redeemed notes are to be used only 
to maintain the gold reserve either through exchanges for free 
gold already in the Treasury or through the purchase of gold 
bullion " at such rates and upon such terms as may be deemed 
most advantageous to the public interest." The law provides 
further that when the gold reserve falls below $100,000,000 
the Secretary of the Treasury shall restore it to $150,000,000 
by borrowing money at 3 per cent, or less on the credit of the 
United States. The redemption of these two forms of money 
in gold is thus assured so long as the credit of the United 
States Government is not itself impaired. 

The national bank notes, the last variety of money to be 
considered, are kept at a parity with gold by being made 
redeemable in legal money either at the Treasury or over the 
counter of the issuing bank. 

As a result of these various expedients, all of which reduce 
to the ready convertibility of the token or credit money con- 
cerned into gold coin, all kinds of money in circulation in the 
United States are kept at a parity, and the gold standard Is 
maintained. So long as the issue of token and credit money is 
restricted within its present limits there seems little ground 
for anxiety in regard to the stability of the standard. 

§ 177. The monetary system of the United States has been 
styled the " limping standard " because it includes with stand- 
ard, token, and credit money, silver dollars, which are full legal 
tender, although they are not by express law redeemable in 
standard gold coin, as are the Treasury notes and greenbacks. 
At the present time there are in round numbers 500,000,000 of 
these silver dollars for which the country has no use in its 
medium of exchange. These seem to serve a monetary use 



The Silver Hoard 317 

through the silver certificates which circulate in their stead, but, 
as a matter of fact, the latter owe their currency not to the silver 
dollars which they represent and which nobody wants, but to 
their convenience for use in retail trade and to the general 
belief that rather than have them depreciate, the Government 
will redeem them in gold in the same way that it redeems its 
other forms of paper money. The silver dollars themselves are 
a dead asset piled up in the vaults of the Treasury at Washing- 
ton, as useless to the Government and to the country as would 
be a similar accumulation of aluminum or copper. What to do 
with these silver dollars is a problem which threatens to embar- 
rass the Government more and more as the country becomes 
more firmly attached to the gold standard. 

At the price (53 cents an ounce) v/hich prevailed July i, 1903^ The Silver 
the 500,000,000 odd silver dollars which constitute the Gov- *^^^ 
ernment's hoard were worth, as bullion, about $200,000,000. It 
can hardly be doubted that the stability of the country's mone- 
tary system would be increased if this amount in gold could be 
substituted for these surplus silver dollars and the $500,000,000 
odd of silver certificates in circulation could be converted into 
an out-and-out credit currency like the United States notes. A 
gold reserve of $350,000,000 would then be available to main- 
tain a credit currency equal to about $850,000,000. 

But there are two objections to this course. The " friends Objectious 
of silver," who must still be reckoned with as a political factor silver 
of no mean importance, would oppose bitterly any attempt to Dollars 
dispose of the nation's silver as bullion on the ground that this 
would still further depress the price of that metal at the same 
time that it tended to enhance the value of gold. When it is 
recalled that the world's annual output of silver is only about 
175,000,000 ounces, the demoralising consequences that would 
follow the sudden offer for sale of nearly 387,000,000 ounces 
will be appreciated. Clearly, any such policy must be carried 
out gradually if the Government is to realise any considerable 
return from its sales of silver bullion. The other objection is 
urged by extreme advocates of the gold standard, who depre- 
cate the use of any money other than standard coin or certifi- 
cates based upon a dollar for dollar reserve of such coin, beyond 
the token money required for small change. Such writers 



The 

Function 
of Token 
Money 



318 Money and the Monetary System 

have long urged the retirement of the United States notes al- 
ready in circulation and would look upon the suggested addition 
to these notes, even though coupled v/ith a proportionate 
strengthening of the gold reserve, as an imprudent innovation. 
To do justice to this latter objection it will be necessary to 
consider the whole question of the proper place of token and 
credit money in a well-ordered monetary system. 

§ 178. The function of token money in connection with the 
gold standard is readily understood. OvAng to their small size 
in proportion to their value, gold coins are not suitable for small 
change. The experience of the United States has demonstrated 
that even the gold dollar is too small to be a convenient coin 
and its coinage was suspended in 1890, leaving the quarter 
eagle ($2.50) as the smallest gold coin in circulation. The ex- 
perience of other countries has led to similar conclusions. Thus 
the smallest gold coin of Great Britain is the half-sovereign 
($2.50), of Germany, the five-mark piece ($1.25), and of 
France, the five-franc piece ($1.00). Token money is resorted 
to to supply gold-standard countries with convenient coins of 
the small denominations required in retail trade. The experi- 
ence of each country must determine what token coins best suit 
the convenience of its business public, but there are certain prin- 
ciples that may be laid down which are of general application : 
(i) The issue of token money should be limited to the actual 
requirements of retail trade, and to insure this result and the 
maintenance of the parity between token and standard money, 
the law should provide for the ready convertibility of one into 
the other. (2) Since the value of token money depends upon 
the demand for it and upon its ready convertibility, the value 
of the bullion contents of such money is of slight importance in 
comparison with its being readily cognisable and convenient in 
size and weight. In fact, the only good reason for having the 
face value of token coins bear a certain relation to the value of 
the bullion they contain, plus the expense of their manufac- 
ture, is that this is the easiest way to prevent counterfeiting. A 
serious objection to the silver dollars of the United States 
regarded as token money is that their silver contents are now 
worth so little in comparison with their coin value that a 
handsome profit might be made by manufacturing silver dollars 



The Function of Credit Money 319 

of standard weight and fineness and in every respect as good 

as those manufactured by the United States. This offers 

entirely too attractive a field for the ingenuity and daring of 

counterfeiters. (3) On the other hand, the margin between 

the bulHon and coin value of token coins should be wide enough 

to allow for considerable variations in the former. Only in 

this way is it possible to avoid the danger that the bullion 

value of such coins shall come to exceed their coin value, with 

the result that they will be withdrawn from circulation. 

The token-money system of the United States, except as Token 

regards the excessive coinage of silver dollars, conforms fairly Money of 

„ , , ••■.-!-, • ., . . , -^ the United 

well to the above prmciples. 1 he mmor silver corns issued are states 

the half-dollar, the quarter, and the dime. These are a legal 
tender in payments of ten dollars or less and, as already ex- 
plained, are redeemable in standard money at the pleasure of 
the holder. The other coins issued are the nickel five-cent 
piece and the copper cent, which are a legal tender in payments 
of twenty-five cents or less, and likewise redeemable in amounts 
of twenty dollars or multiples thereof. The most striking dif- 
ference between this system and those of European countries is 
the relatively high value of the coin of lowest denomination 
which it includes. The smallest coin of Great Britain is the 
farthing (j4 cent), of Germany, the pfennig (34 cent), and of 
France, the centime (V5 cent). Except for this possible defect, 
the American system appears to meet all the requirements of 
the country's retail trade. 

§ 179. Credit money, in distinction from the sm.all change The 
that we have called token money (which is, of course, small- ■^f"r*^''lj> 
change credit money), is justified not on the ground that it adds Money 
to the convenience of the medium of exchange, but that it is 
economical. Thus the United States notes in the monetary sys- 
tem of the United States are no more convenient than gold cer- 
tificates, and their retirement through the substitution for them 
of gold and gold-secured certificates would not impair in the 
least the efficiency of the country's medium of exchange. The 
objection to such a policy is that it would entail useless expense 
upon the Government and would tie up many millions of the 
world's gold for a purpose which credit money serves as well. 
The latter, when issued in the form of paper notes, is as accept- 



Objections 
to Credit 
Money 



320 Money and the Monetary System 

able to the business community as any other form of money, so 
long as its ready convertibiUty into standard coin is assured. 
This convertibility can be maintained by means of a gold 
reserve equal to only one-half, one-third, or even, in the opinion 
of some writers, one-fourth of the credit money in circulation. 
Such a small reserve is adequate to the purpose because, in 
practice, gold itself is a very awkward medium of exchange. 
It is required only as a means of making payments abroad, for 
use as bullion, or as a special reserve by private credit institu- 
tions, and these combined uses call ordinarily for but a small 
amount of gold coin in comparison with the total mone- 
tary needs of a country. When gold is required credit 
money may be presented to the Government for redemption. 
If this credit money is withheld from circulation until it can 
be exchanged again for gold, to be added to the gold reserve, 
and if the public treasury is empowered, as is the Treasury 
of the United States, to borrow money {i. e., gold) on the 
public credit to replenish the gold reserve whenever it is 
reduced below a certain point, there seems every reason to 
believe that the convertibility of a moderate amount of credit 
money, say, one-half of the money in general circulation, could 
be maintained in the face of any emergency. It is equally clear 
that such a system, if operated in a way that commanded full 
public confidence, would effect a considerable saving. The 
credit money in circulation over and above the gold held in the 
gold reserve represents virtually so much gold saved to the 
country and to the world. So long as gold is a highly valuable 
commodity, serving a great variety of uses besides that of 
money, this saving is a matter of no slight importance. 

The case of the opponents of credit money rests, not on a 
denial of the economy of such a system, so long as it com- 
mands full public confidence, but on the conviction that modern 
governments are not yet developed to a point where they can 
manage such a delicate device as credit money in a way to retain 
public confidence. Back of credit money is the elaborate ma- 
chinery of commercial credit, to be discussed in the next chap- 
ter, and in comparison with the losses that would follow any 
disturbance of this credit in consequence of a distrust of the 
essential soundness of the monetary system, the economies 



Conclusion 321 

Iraceable to credit money itself may properly be described as 
petty and unworthy of serious consideration. 

The recent history of the United States furnishes abundant Credit 
material in support of this distrust of the ability of a demo- the"uni"ted 
cratic government to maintain a credit money system that will States 
be above suspicion. In interpreting this history, it must not be 
forgotten, however, that the credit money system was never 
deliberately adopted. When the United States notes were 
issued during the Civil War it was with no intention of add- 
ing them permanently to the circulating medium. The act which 
accomplished that purpose (1878) was passed as a compromise 
between those who favoured an out-and-out fiat standard and 
those who desired to see all paper money withdrawn from 
circulation; and neither side has ever been entirely satisfied 
with the arrangement. In the same way the Bland-Allison Act 
was a compromise between those who desired the free coinage 
of silver, and who in 1878 controlled a majority of the votes 
in the House of Representatives, and those who preferred to 
have the use of silver confined to small change. Twelve years 
later the matured strength of the advocates of free coinage 
forced Congress as a further compromise to pass the Sherman 
Act, which was only prevented, through its repeal by a reluc- 
tant Congress in 1893, from so inflating the currency with 
Treasury notes and silver dollars as to drive gold out of circu- 
lation and debase the standard. During this period the Gov- 
ernment was forced four different times to issue bonds on 
unfavourable terms to maintain the standard, and although it 
succeeded in this object, the distrust engendered was probably 
the chief cause of the crisis and subsequent depression from 
which the country suffered from 1893 ^o 1897. 

Little favourable as is the above recital to the system of Conclusiiii 
credit money, it is believed that this very experience has taught 
the country a lesson that it will not soon forget and that there 
is little danger of a repetition of similar occurrences. As oppo- 
sition to the gold standard itself loses its force, as it bids fair 
to do, the gold reserve necessary to the maintenance of that 
standard and of a large volume of credit money will, it is be- 
lieved, be accepted by all parties as a necessity. Although 
fully impressed with the unwisdom of endangering the sound- 



322 Money and the Monetary System 

ness of the monetary system for the sake of the petty economj'' 
resulting from the use of credit money, the author beheves 
that general enlightenment on the money question has advanced 
so far that a country like the United States can make moderate 
use of credit money with perfect safety. He would even go to 
the length of advocating the gradual substitution of United 
States notes for the silver certificates now in circulation and 
the gradual liquidation of the Government's hoard of silver in 
exchange for gold to be added to the gold reserve. The 
soundness of the monetary system of the country would, in his 
opinion, be materially increased if, for the 500,000,000 surplus 
silver dollars now stored at Washington, $200,000,000 in gold 
were added to the gold reserve as a redemption fund for the 
$500,000,000 in demand notes which might be substituted for 
the outstanding silver certificates. Whether the gold standard 
supplemented by as much token money as the business com- 
munity needs and as much credit money as the Government 
can safely maintain, is the best monetary system for a country 
like the United States is one of the " unsettled monetary 
problems," the discussion of which is postponed until some 
attention has been given to the subjects of " credit and 
banking." 

REFERENCES FOR COLLATERAL READLNG 

Among the older works on money, the best are: *Jevons, Money and 
the Mechanism of Exchange ; Walker, Money in Its Relation to 
Trade and Industry, and * Nicholson, Money and Monetary Problems. 
The most important recent works on the subject are: * White, 
Money and Banking ; Scott, Money and Banking (good bibliog- 
raphy); Laughlin, The Principles of Money; *Kznley, Money 
and Credit; ^Johnson, Money and Currency. More condensed 
discussions of the subject will be found in *Hadley, Economics, 
Chap. VII., and ^Pierson, Principles of Economics, Part II. 
Treating more especially of the monetary history of the United 
States are: Laughlin, The History of Bimetallism in the United 
States; * Dewey, The Financial History of the United States ; 
Dunbar, Laws of the United States Relating to Currency, Finance, 
and Banking, 1789 to 1891 ; Report of the Indianapolis Monetary 
Commission (1898), and Noyes, Thirty Years of American Finance. 



CHAPTER XVIII 

CREDIT AND BANKING 

§ 1 80. Credit, or a promise to pay at a future time for a The 
valuable consideration received in the present, is probably as old q^^^^^ 
as the practice of exchange. The only condition essential to its 
use is confidence on the part of the creditor that the promised 
payment will be made when due, and this must have been 
among the earliest fruits of social intercourse. With every 
increase in the mutual confidence which binds together the 
members of business com.munities a larger field has been 
opened to credit, until at the present time there is hardly a 
business man who does not figure daily either as a creditor 
or a debtor in some credit transaction. 

With the introduction of money as the medium of exchange, 
the custom arose of using the monetary unit as the medium of 
credit, or of deferred payments. This is now so universal that 
little or no exaggeration is involved in defining credit as '* a 
prom^ise to pay money." The written forms in which promises 
to pay money are drawn up are conveniently designated as 
" credit instruments " or " credit paper." 

Like most of the terms of economics, " credit " is used in 
other senses than that chosen for definition. Business men talk 
habitually of " having credit " and of " giving credit." To 
have credit is to enjoy a reputation for integrity which in- 
spires confidence or to possess property that may be pledged. 
To give credit, on the other hand, is to accept another's promise 
to pay in exchange for a valuable consideration. It is ob- 
vious that business men will " give credit " only to those who 
" have " it and that both are necessary to the existence of 
negotiable credit instruments. 

§ 181. Of all forms of credit the simplest is verbal or book Book Credit 
credit, resorted to whenever a purchaser has things " charged." 
This practice has many advantages. In agricultural com- 

323 



324 Credit and Banking 

munities in which incomes are received only at long intervals 
when the crops are ready for sale, book credit at the country 
store enables the farmer to secure supplies for himself and his 
family during the periods between harvests. Without it and 
without capital of their own, farmers in many sections would 
be unable to make a living. In factory towns and cities where 
wages are paid by the month, book credit is indispensable to the 
maintenance of many workingmen's families. It would be 
better, doubtless, if wage-earners would save enough to be able 
to live on the earnings of the previous rather than of the current 
month, but as yet there are few places in which many persons 
in this class do not resort regularly to credit for some of their 
purchases before the advent of pay day. More important, be- 
cause more clearly beneficial, is the use of book credit in con- 
nection with large retail stores where it obviates the necessity 
for small payments. If every purchase made in a day in a city 
department store were paid for in money on the spot, twice as 
many clerks would be needed, and customers would be kept 
.waiting four or five times as long as is now necessary. In fact 
it is doubtful whether well-to-do customers could be retained 
by a large store which insisted on doing all its business on a 
cash basis, and it is certain that the prices charged would have 
to be materially lower than in other stores to compensate for the 
disadvantages of the system. The extent to which book credit 
serves as a medium of exchange in the United States can only 
be guessed at, but it is believed that it figures in connection 
with fully one-half of the wholesale and retail transactions that 
take place. 

In agricultural districts it is not unusual for the merchants 
who sell on credit to be themselves purchasers of their cus- 
tomers' products. Where this is the case debts contracted dur- 
ing the year may be cancelled by credits secured when the crops 
are sold and book credit may serve as the sole medium of ex- 
change. More commonly the use of book credit simply defers 
payment until settlement day, when some other medium of ex- 
change is called in to balance the account. Generally this other 
medium is some form of credit created by a bank, such as a 
check or a draft. 

§ 182. A bank is an institution which deals in money and 



The Banking Business 325 

credit. It receives deposits ; pays them out again on the writ- 
ten order or " check " of the depositor ; sells " drafts " or 
orders for money on its correspondents in other places ; lends 
at interest money, deposit credits, or its own " bank notes " ; 
*' discounts " notes and bills of exchange ; sells " foreign ex- 
change " or drafts on its correspondents abroad, and sometimes 
provides safety-deposit boxes for the storage of valuables. In 
addition to commercial banks, like the national banks in the 
United States, to which the above description applies, there are 
other banking institutions which perform only a limited num- 
ber of these functions and combine with them others that do 
not fall strictly within the field of banking. Such are savings 
banks and trust companies. 

Historically, lending is an older banking function than bor- 
rowing. Thus the Bank of England was incorporated in 1693 
primarily for the purpose of lending to the Government 
£2,000,000 at 8 per cent, interest. The capital necessary to carry 
through this operation was subscribed by merchants of London, 
who soon fell into the habit of entrusting their surplus funds 
to the bank and of borrowing from it themselves when occasion 
required. As the deposits of a commercial bank must be repaid 
on demand, the practice of lending the deposits as well as the 
capital of a bank was at first looked upon as a dangerous inno- 
vation. Experience has shown, however, that although all de- 
positors have the right to withdraw their deposits on any given 
day, in practice only a small portion of them will do so. By 
lending money for short periods and arranging loans so that 
a certain proportion of them become due each day, a modern 
bank is able to lend at interest from two-thirds to three-fourths 
of its deposits without running any serious risk of becoming 
bankrupt. Of course, to continue this policy, it is necessary 
for a bank to command the confidence of its depositors. If 
they are suspicious or timid, some slight circumstance may 
start a " run on the bank," which may prove fatal, since no 
bank can do a profitable business and at the same time be in 
a position to repay at any time all of its depositors. Banking 
thus depends for its success more than any other business upon 
the confidence which customers have in those directing the 
enterprise. It is this confidence that attracts deposits. The 



'■ 3^6 Credit and Banking 

same confidence holds them after they have been made and 
enables the bank to turn them to profitable account. The con- 
fidence of other banks, finally, may preserve a bank subjected 
to a run from becoming insolvent. For these reasons bankers 
should be men of tried business experience, whose integrity 
is above suspicion. 

The Check 8 ig-z. One reason why a bank may count with confidence on 
System ^. . , , . . , . , . ^ 

retammg control over the major portion of its deposits from 

day to day, is because the check is such a convenient means 
of payment that it tends to become the principal medium of 
exchange in communities in which banking is developed. If 
all of the inhabitants of a town had deposits in the same bank, 
it will readily be perceived that payments between them might 
be made exclusively by means of checks and that such payments 
need involve the actual withdrawal of no money from the 
bank. The butcher, the grocer, the dry-goods merchant, the 
lawyer, the physician, etc., might exchange checks at the end 
of each Vv'eek or month, and these transfers could be noted on 
the books of the bank. No money would be required, because 
under the assumed conditions checks would accomplish all of 
the exchange work to be done. Only when payments to per- 
sons who were not depositors in the bank were made would 
the bank's deposits be encroached upon. No community has yet 
developed to a point where checks are used for all of its trans- 
actions. In fact, for small payments, the convenience of using 
checks is more than counterbalanced by the expense connected 
with transferring small amounts from one account to another. 
Moreover, as a community grows, competing banks are like!)/' 
to start up, and this gives rise to checks drawn on different 
banks and prevents that easy transfer of accounts possible 
when one bank monopolises the business. To reduce to a 
minimum the transfers of money necessitated by the existence 
of different banks in the same locality, the banks themselves 
have devised what is known as the " clearing house." Where 
no clearing house exists, each bank which receives checks 
drawn on other banks is under the necessity of sending such 
checks by special messenger to the banks against which they 
are drawn and demanding payment for them. A clearing 
house is an institution where such messengers from different 



Checks and Drafts 327 

banks may come together daily and exchange checks, receiving 
in payment only the balance due to each bank from all of the 
others belonging" to the clearing house. By this means checks 
aggregating millions of dollars may be exchanged through the 
transfer of only 5 or 6 per cent, of the amount in money. Even 
this transfer involves no actual reduction in the amount of 
money on deposit, since some banks gain what others lose. 
Thus, with a well-organised clearing house, the affiliated banks 
in a city in which checks are the preferred means of payment 
may count with certainty on retaining control over the greater 
part of their deposits, so long as they continue to command 
the confidence of their depositors. 

In the United States the use of checks for paying debts in Checks 
distant cities 13 becoming almost as general as for paying debts 
at home. To facilitate this process each bank has its corre- 
spondent in each of the large cities of the country, to which 
it sends checks drawn on banks in those cities which it has 
received on deposit or cashed for its customers. These checks 
are sent to the clearing house like any others by the bank 
receiving them, and, if good, are credited to the account of the 
bank making the remittance. The process is made still simpler 
by the use of drafts drawn by the customer's bank against its 
correspondent in the city to which remittance is made and 
given in exchange for checks against the customer's deposit. 
The obvious advantage of drafts for distant payments is that 
they do not need to be returned to the place where they orig- 
inate before they are paid and cancelled. 

The use of checks, drafts, and post-ofiice, express, and tele- Money 
graph money orders as media of exchange confines the use of 
money in progressive communities vi^ithin very narrow limits. 
Well-to-do people in cities in the United States already use 
money only for small-change transactions and for travelling 
expenses. As the country becomes more densely inhabited and 
credit institutions are perfected, it hardly admits of question 
that this custom will become more general and that credit will 
serve as the medium for an ever larger proportion of exchange 
transactions. This does not mean that the monetary unit will 
lose its importance as the standard of value, since all credit 
•instruments are expressed in terms of money. In fact, since 



and Credit 



328 Credit and Banking 

credit is based on confidence, the wider the extension of credit^ 
the more vitally important will the soundness and stability of 
the monetary system become. 
Importance § 184. Lending, which was the first, is still, from the point 
to Banks^ ^^ view of the banker, the most important function of a bank. 
He is willing to accept deposits and to maintain the clerical 
force necessary to the efficient operation of the check system, 
because in this way he adds to his loanable resources. It is 
through lending the latter at interest that he derives the greater 
part of his profit. Lending deposits is so remunerative that 
banks, especially in cities, are active competitors for deposit- 
ors. The inducements they offer range from ready accommo- 
dation v/ith loans, which appeals especially to active entrepren- 
eurs, to the payment of a small rate of interest even on call 
deposits. Some city banks even go so far as to send their 
own messengers to collect deposits and to cash checks for their 
customers, so that the latter are spared the trouble of visiting 
the bank. One reason for this active competition is the belief 
that deposits themselves attract and hold deposits. Confi- 
dence is infectious, and when a business man observes that 
others are entrusting millions of dollars to a particular 
bank he is the more ready to entrust to it his own surplus 
funds. 
Forms A bank's loans may assume a variety of forms depending 

Loans Upon the kind of security accepted and the conditions as to 

interest. The simplest sort of a loan is on the personal note 
of the borrower, secured only by his individual name. Such 
notes are known as " single-name paper " and are entirely 
acceptable to bankers when the credit of the giver of the note 
is above question. A more common kind of loan is on the per- 
sonal note of the borrower endorsed by some friend or busi- 
ness associate, who, by writing his name on the note, makes him- 
self also liable for the payment of the obligation. " Two-name 
paper " is, for obvious reasons, more acceptable than single- 
name notes. Endorsements on notes may be multiplied indef- 
initely, and each new name adds something to the value of the 
security. 

Even more acceptable to bankers than personal notes are 
notes secured by a pledge of stocks or bonds, called in this 



Call and Time Loans 329 

connection " collateral." If such notes are not paid when they 
fall due the banker is at liberty to sell the securities pledged 
and reimburse himself for principal and interest from the pro- 
ceeds. To lend intelligently on collateral security the banker 
must be well informed as to the value of stocks and bonds, and 
it is for this reason that he is compelled to follow closely the 
variations of the stock market. In addition to lending on paper 
created for the purpose of the loan, banks lend by discounting 
notes and bills of exchange created in connection with ordinary 
mercantile transactions. A bill of exchange is an order drawn 
by one person directing another to pay a certain sum of money 
on a certain date to a third person named in the bill. Such bills, 
or drafts (a name also applied to them), are the constant re- 
course of merchants who sell on credit. When drawn by a 
merchant who enjoys the confidence of his bank they are readily 
discounted by the latter, that is, purchased at their face value 
less interest on the principal at the current rate to the time when 
they fall due. In such a transaction a bank virtually lends its 
customer the face value of the note less the discount, which is 
in this case the interest, relying upon him to reimburse it if the 
person against whom the bill is drawn fails to pay. To avoid 
misunderstanding, banks which discount bills of exchange 
usually lose no time in having them brought to the attention of 
the persons against whom they are drawn for their " accept- 
ance." An accepted bill resembles an endorsed note in that two 
persons are legally responsible for its payment. 

Besides differing- in their form, bank loans differ as to the Call and 

. Time 

conditions of payment. In this connection " call " or demand Loans 

loans, short-time loans, and long-time loans must be distin- 
guished. Call loans are payable at any time at the will of 
either lender or borrower. They are based usually on collateral 
security, and the borrower who fails to respond promptly to a 
bank's request for payment runs the risk of being " sold out," 
that is, of having the security sold to reimburse the bank. As 
such forced sales are not likely to be advantageous, borrowers 
on call have every inducement to meet their obligations 
promptly. Short-time loans are loans which " mature," or fall 
due, within thirty, sixty, or ninety days. Next to call loans, 
these are preferred by a commercial bank, which likes to have 



330 



Credit and Banking- 



Banks 

Lend 



its resources as completely under control at any given time as 
possible. Long-time loans are loans that run for six months or 
more and are made more frequently by savings banks, trust 
companies, and private bankers whose obligations to depositors 
do not usually call for repayment on demand. The intelligent 
banker makes the combination of these various kinds of loans 
that will secure for his bank the largest average rate of return 
without so tying up its funds that they cannot be quickly con- 
verted into cash to meet an emergency. 

§ 185. From what has been said thus far, it might be inferred 
tiieir"Credit that a bank's credit figures only on the deposit side of its busi- 
ness. It is credit that attracts depositors, and the bank's own 
capital and the deposits entrusted to it appear to the unini- 
tiated to be the resources which limit its lending capacity. As 
a matter of fact, modern banks take advantage of the business 
community's preference for checks as a means of payment to 
lend deposit credits as well as money. The present-day bor- 
rower from a city bank desires, in nine cases out of ten, not 
money, but a deposit credit on the books of the bank against 
which he may draw checks at his convenience. Even if he 
wishes to pay at once to another the whole amount borrowed, 
he will usually prefer to draw a check for it rather than to pay 
it in money. From this it follovi/s that the deposit liabilities 
of a modern city bank represent quite as largely sums loaned 
by it to business men as sums entrusted to it by such men. A 
bank lends its credit quite as freely as it utilises that credit in 
inducing others to lend to it. 

The same considerations which cause bona fide deposits to 
be left under the control of the bank, so long as it retains the 
confidence of its customers, causes loaned deposits to be left 
with it also. The man who borrows from a bank wants ordi- 
narily purchasing power to use m some business transaction. 
This purchasing povi^er may pass to someone else, but vmder 
present conditions the new owner is almost certain to entrust 
it, at least temporarily, to a bank for safe -keeping. Presently 
his business dealings may cause him to transfer it, or a 
part of it, to a third person, but again the chances are all in 
favour of its being left on deposit with a bank rather than 
being withdrawn as money. Before the purchasing power 



By Means 

of Deposit 
Accounts 



Bank Loans 331 

loaned by the bank has left its control, or the control of afHli- 
ated banks, it is more than likely, in the ordinary course of 
business, that the loan will mature and equivalent purchasing- 
power will be returned to the bank. In this fashion a bank is 
able to receive interest for assuming demand liabilities which it 
may not, as a matter of fact, ever be called upon to discharge. It 
must always be ready to discharge them on pain of bankruptcy, 
but it may count with confidence on being called upon to dis- 
charge only a portion of them from day to day. This ability of 
a bank to make a profit by lending that intangible thing called 
credit is what makes successful banking so profitable and at 
the same time exposes bankers to such serious temptations. 
Banking experience in a given locality may suggest that a cash 
reserve of at least 30 per cent, of the deposit liabilities ought to 
be held in readiness to satisfy at any time a bank's depositors. 
If this amount is held, a loan business, in the form of deposit 
liabilities, of $1,000,000 may be maintained by means of a 
reserve of $300,000. The same $300,000 would maintain a loan 
business of $1,200,000 if 25 per cent, were an adequate reserve. 
The interest on the additional $200,000 is the temptation which 
is constantly presented to the banker to depart from the lessons 
of banking experience and maintain a somewhat smaller reserve 
than is entirely safe. A reserve of 25 per cent,, 20 per cent., 
or even 10 per cent., might be adequate under ordinary busi- 
ness conditions. But the reserve must be sufficient to meet 
not only ordinary demands, but any demands that are likely to 
arise. It is because bankers are apt in times of business pros- 
perity to forget the lessons of the past that the banking busi- 
ness has appeared a fit object for state supervision and regu- 
lation. 

Besides lending their credit in the form of deposit liabilities, Or Bank 
banks which enjoy the privilege of issuing bank notes, that is, 
the bank's promises to pay on demand without interest the 
sums named on the face of the notes, may lend their credit 
in this form. When the credit of a bank is securely estab- 
lished in a community its promises to pay may be considered 
as " good as gold." Under such circumstances borrowers 
from the bank will be as willing to accept bank notes as legal 
money in case they wish some other means of payment than 



332 



Credit and Banking 



Interest 
on Bank 
Loans 



Paid 

for Control 

over 

Capital 



Grold Coin 
is Capital 



their own checks. In cities, where checks can be presented to 
the bank against which they are drawn within a few hours and 
their value established, most business men prefer them to bank 
notes. In country districts, however, checks are not acceptable 
because of the risk involved in trusting the drawer of a checlc 
until it can be presented at the bank against which it is drawn. 
If confidence is felt in the bank, no such objection will be 
raised to bank notes, since they carry on their face the liability 
of the bank. It follows that country banks enjoying the privi- 
lege may loan their credit through the issue of bank notes, 
when otherwise loans would have to be made in cash and credit 
could enter into their business only as a means of attracting 
depositors, 

§ 1 86. In a previous chapter interest was described as the 
share of wealth assigned to capitalists for the use of their cap- 
ital, or as the earnings of capital. Interest on bank loans does 
not at first thought appear to fall under this definition. Are 
the money and credit which banks lend capital? If not, 
what service do these render to induce borrowers to pay 
interest for their use? Satisfactory answers must be given 
to these questions to justify our definition of interest. 

Those wdio borrow from banks wish, usually, purchasing 
power to enable them to obtain — or, at times, to retain — con- 
trol over a share of the community's capital. What they really 
borrow is not the money or the deposit credit which the bank 
transfers to them, but the concrete forms of capital, economic 
goods of various kinds, or stocks and bonds which represent 
part ownership in aggregates of economic goods, which they 
purchase with this nioney or deposit credit. The purchasing 
power which the bank supplies is simply the convenient 
medium by means of which control over capital is secured^ 
and interest is paid for its use, ordinarily, simply because the 
capital which it represents earns Interest. It is a derived form 
of interest accounted for by the interchangeability of purchas- 
ing power and capital goods. 

For a community which uses as its medium of exchange only 
self-regulating standard money, for example, gold coin, the 
answers to the questions propounded above may be given 
without hesitation. Such gold coin is itself capital, that is^ 



Interest on Bank Loans 333 

the product of past industry used as an aid (as the " tool of 
exchange") to further production. Only so much wealth will 
be thrown into this form as can earn the same rate of return 
that is obtained by other kinds of capital goods, and this 
return will be secured because, as the universal medium of 
exchange, money represents all other goods. It is the transi- 
tion form into which capital is thrown as it passes from the 
control of those who do not want it as embodied in particular 
capital goods, to those who do want it as so embodied, and 
confers upon its possessor command over whatever combina- 
tion of capital goods he may require. His willingness to pay 
interest for its use follows necessarily from this command 
over interest-earning capital goods which it bestows. 

But no community iises standard money only as its medium Credit is 
of exchange. The credit of the government is called in to give tal^'^biU^t" 
currency to token and credit money. Where banking is devel- Does the 
oped, bank credit also serves on a vast scale as a medium of standard 
exchange. Can this credit which so largely takes the place Money 
of standard money in modern business communities be prop- 
erly included under the definition of capital? If not, what 
service does it render which entitles those who furnish it to 
interest for its use? It must be clearly asserted at the outset 
that credit is not capital. It may enable the person who enjoys 
it to secure capital. It may even, to the extent that it serves 
equally well as the medium of exchange, take the place of 
capital in the form of standard money. But it is not itself 
capital. Nevertheless, interest is paid for its use for exactly 
the same reasons that it is paid for the use of standard money. 
What the business man wants when he borrows from a bank 
is purchasing power. If the bank can supply this in the form 
of a deposit credit, against which he may confidently check 
at will, or in the form of bank notes, he is as well, if not 
better, pleased than if it supplies it in the form of standard 
money. What he really wishes is the goods to be bought for 
the purchasing power loaned him. It is for these that he is 
wilHng to pay interest. It is even these that are really loaned 
to him, since the bank transfers to him a part of its own 
<^ontrol over the collective wealth of the community. The 
purchasing power which figures in the transaction soon passes 



334 Credit and Banking 

on to someone else and continues to circulate in the com- 
munity, changing hands perhaps hundreds of times before 
the loan falls due and equivalent purchasing power must 
be returned to the bank by tlie borrower. A demand for bank 
loans is thus at bottom not a demand for money or for credit, 
but a demand for a part of the community's capital. Money 
or other purchasing power is transiently needed to put the 
borrower in control of the capital he wishes, but its task is 
quickly done, while the capital remains in the borrower's pos- 
session. His demand for it is due, not to his position as a 
borrower, but to his position as a prospective buyer, and the 
aggregate demand for m.oney is no greater in a community in. 
which all purchases are made with borrowed money than it is 
in a community where the same volume of purchases is made 
with money owned by the purchasers themselves. 
Limitations § 187. Conceding the accuracy of the above analysis, the 
of Bank reader may be inclined to ask why bank credit, the cheaper 
Credit medium of exchange, does not, in obedience to Gresham's Law, 

entirely supersede standard money. This is because there are 
very definite limits to the use that may be m.ade of it. In the 
first place, it must never be forgotten that bank credit is efficient 
as a medium of exchange only so long as it is convertible at will 
into legal money. Bankers must be constantly on their guard 
against unduly multiplying their deposit or note liabilities, and 
the public must be constantly on its guard against trusting 
bankers who are not safe, conservative men. These two con- 
siderations confine the banking business to those men who may 
be trusted not to be carried away by the possibilities of gain 
afforded by their position, and cause such men to regulate their 
use of credit by reference to the reserve of legal money which 
they are able to maintain as a guarantee that all obligations 
will be instantly discharged. A second point to remember is 
that the nature of bank credit limits its use to borrowers whose 
need of purchasing power is only temporary. A commercial 
bank cannot lend on long-tim.e paper to any considerable 
extent without losing that quick control over its assets that is 
indispensable to its solvency, since nearly all of its liabilities 
must be discharged on demand. Its loans must be on call or 
short-time paper, and this confines its services to business mert 



Short-time Loans 335 

whose transactions are of such a nature that they can count 
confidently on ability to repay after a brief interval what they 
have borrowed. 

Within the limits determined by the nature of their business, Interest oi. 
commercial banks compete actively to lend their credit at inter- Usually^^^ 
est. Where banking is well organised this insures to those Low 
business men who can avail themselves of call and short-time 
loans, accommodation at rates of interest as low, and at times 
even lower than that paid by the safest long-time investments. 
The lowest rate normally is that paid for call loans. Only 
rnen who are engaged in operations on the stock exchange, 
which they believe they can conclude without loss on short 
notice, venture, usually, to make themselves liable for loans of 
this character. In contrast with the limited demand for such 
accommodation on the side of borrowers, there is an almost 
indefinitely large supply of funds to be loaned at call on the 
side of lenders. Other things being equal, call loans are those 
dearest to the banker's heart. They enable him virtually to 
*' have his cake and eat it too," to retain control over his assets 
at the same time that these are earning interest. These two 
circumstances explain why the call rate is somxCtimes as low 
as one-half of i per cent, and usually lower than the rate on the 
safest bond investments. The call rate is also the one subject to 
the most violent fluctuations. Those who borrow on call do so 
nearly always to buy stocks or bonds. If their calculations mis- 
carry, they may be asked to repay at the very time when it is 
most awkward to do so. Rather than sell, on a depressed 
market, the securities they have purchased, borrowers are 
often willing to pay extravagant rates of interest for a few 
days in the hope that the prices of these securities will rally. 
It is thus not uncommon for the call rate to rise to 50, 75, or 
even 100 per cent, for a few hours or days when a panic in 
stocks is in progress and banks are calling in their loans in 
anticipation of stormy weather. 

Loans on short time, which are less attractive to lenders, are, Short-time 
on the whole, more attractive to borrowers, but, as before, 
those who wish the use of purchasing power for thirty, sixty, 
or ninety days only, are a limited class. The normaj relation 
between supply and demand fixes the rate of interest on short 



336 



Credit and Banking 



Competi- 
tion Ad- 
justs Bank 
Rate of 
Interest to 
General 
Rate 



Ought 
Banking 
to be 
Regulated? 



time loans comfortably above the call rate and even somewhat 
above the rate on such permanent investmicnts as safe railroad 
bonds or real estate mortgages. The rate on long-time loans is 
little affected by the use of bank credit as a medium of ex- 
change in place of standard money, for the reason already 
explained that commercial banks cannot aft'ord to tie up their 
loanable funds under long-time contracts. 

Speaking generally, it is the tendency in countries in which 
the banking business is open to all who can command the requi- 
site capital, as it is in the United States, for the supply of funds 
loanable at call or on short time to be multiplied until the rate 
of interest on such loans bears a certain normal relation to the 
rates of interest in other fields of investment. Ability to loan 
their credit as well as standard money enables commercial 
banks to satisfy the requirements of business men at lower rates 
of interest than could possibly be offered if every loan nego- 
tiated meant so much cash withdrawn from the control of the 
bank. Competition prevents the banks from retaining for them- 
selves the profit which results from the use of their credit. 
They share it with their customers, and through these custom- 
ers the whole business community is benefited. At last analy- 
sis, rates of interest on bank loans are determined, like other 
rates of interest, by the earning power of capital. Credit serves 
merely to supplement standard money as a medium of exchange 
and introduces no new principle to necessitate a qualification of 
the explanation of interest already given. 

§ 1 88. There is still great difference of opinion among econ- 
omists as to whether banking ought to be entirely free or regu- 
lated by law. The reasons in favour of unregulated banking 
are similar to those in favour of freedom in other fields of busi- 
ness enterprise. It is pointed out that the credit relations into 
which banks enter with their depositors and borrowers are 
purely voluntary, and that ordinary economic motives tend to 
concentrate the business into the hands of upright and conserv- 
ative men. Moreover, it is maintained that the normal expan- 
sion and contraction of bank credit are of such vital importance 
to the whole business community that their regulation ought to 
be entrusted to those who have been chosen by a process of 
natural selection to manage the banking business, and not sub- 



Reasons for Favouring Regulation 337 

jected to administrative rules of thumb. Bank credit, in the 
form of deposit accounts and bank notes, is a highly flexible 
element in the medium of exchange. By means of a check a 
million dollars may be paid out as readily as one dollar. Where 
all business men have bank accounts the medium is made abso- 
lutely elastic by means of this convenient credit device. Bank 
notes are not quite as elastic as checks, and yet when additional 
currency is required to pay wages and interest at the end of 
the month, the half-year, or the year, to move the crops at har- 
vest time, or to provide for some other passing need, the nature 
and extent of which are perfectly well understood, banks, which 
are not restricted, may meet the emergency by adding to their 
note liabilities. 

The importance of an elastic element in the m.edium of 
exchange can hardly be exaggerated. In every community 
the need for the medium of exchange is variable. At cer- 
tain times few exchanges take place, and a small amount of 
money and its substitutes will maintain prices at their nor- 
mal level. At other seasons buying and selling are active, the 
medium of exchange is in great demand and unless, as a whole, 
it expands readily to meet the situation, the disease known as a 
" money stringency " will attack the community with its accom- 
panying symptoms, a rising rate of interest and falling prices. 
A varying dem.and for the medium of exchange is especially 
characteristic of agricultural com.munities. During the greater 
part of the year the buying and selling which take place among 
farmers are of very small proportions. At harvest time, how- 
ever, the entire product of the year's industry changes hands, 
often within a period of two or three weeks. Unless the me- 
dium of exchange expands readily at such seasons, a money 
stringency is sure to occur and prices will fall at the very time 
when it is most important to the whole community that they 
should be sustained. Advocates of unregulated banking main- 
tain that elasticity in the check and note currency can best be 
secured by permitting bankers to exercise perfect freedom in 
the conduct of their business. 

Notwithstanding the force of the arguments in favour of un- Reason.^ for 
regulated bankmg, nearly all countries subject their banking fe\egulatio« 
institutions to some degree of control, and for reasons which 



338 



Credit and Banking 



History 

of the 
National 
Banking 
System 



The 

Present 

Law 



seem to the writer conclusive in favour of the policy. The ex- 
tension of banking depends primarily upon the presence in the 
community of mutual confidence. Depositors and note-holders 
must have confidence in the bank officials. Banks, in turn, must 
have confidence in those to whom they lend. This mutual con- 
fidence is of slow growth, and since its fruits are so important 
everything should be done to preserve it after it has developed 
to a point which makes banking practicable. If each bank were 
judged by itself in the popular mind the arguments in favour 
of free banking would be convincing; but the popular mind 
does not judge each bank by itself. It judges of the institution 
of banking as a whole. One bank failure in a community in 
which banks are just developing will serve to bring the whole 
business into disrepute. For this reason it is to the interest of 
bankers themselves to have their business subjected to regula- 
tions which will hold them all up to a certain standard of hon- 
esty and conservatism. Admitting the need of government 
regulation as a condition to the highest development of the 
banking business, it remains a difficult question to decide in any 
given case how far regulation should go. This concrete aspect 
of the problem can best be considered in connection with a 
description of the national banking system of the United 
States. 

§ 189. The national banking system of the United States 
was an outgrowth of the Civil War. To meet the expenses of 
that struggle the Federal Government was forced to issue 
bonds on an unprecedented scale. The national banks were 
created to furnish a market for these bonds and at the same time 
to take the place of the State banks, which were not in a sound 
condition in all sections of the country. The original act, 
passed in 1863, was revised in important respects by the 
National Bank Act of June, 1864, which, as amended by sub- 
sequent statutes, is still the basis of the system. 

General supervision over the national banks is vested in the 
Comptroller of the Currency, who represents the Secretary of 
the Treasury in all his relations with these institutions. The 
law permits the former officer to issue certificates of incorpo- 
ration, valid for twenty years, to any five reputable citizens who 
wish to establish a national bank and can command the requt- 



Protection for Depositors 339 

site capital.* Banks organised with a capital of $150,000 or 
less must invest one-fourth of their capital in United States 
bonds and deposit them with the Comptroller of the Currency. 
Originally, larger banks had to so invest one-third of their capi- 
tal, but at present the requirement for such banks is the de- 
posit of $50,000 only in bonds. Any national bank may so 
invest its entire capital. In exchange for the bonds deposited, 
the Comptroller is required to issue national bank notes up to 
their par value (or their market value if they are quoted below 
par). Banks which receive such notes must deposit, in addition 
to the bonds, a redemption fund in lawful money equal to 5 per 
cent, of the face value of their notes in circulation. On the 
strength of this double security the United States Government 
assumes responsibility for the redemption of such notes, with 
the consequence, as already pointed out, that they are con- 
sidered as safe throughout the United States as any kind of 
money in circulation. Besides issuing notes — a function 
practically confined to the national banks, since the demand 
notes of State institutions are subject to a tax of 10 per cent. 
under an act passed in 1865 — ^the national banks may engage 
in a general banking business, except that they may not lend on 
the security of real estate. 

Depositors in the national banks are protected in various Protection 
ways. When such banks fail, their stockholders are liable to Depositors 
assessment, to m.ake up any deficit, up to the full par value of 
their stock. The banks are required to make at least five re- 
ports of their condition in the course of each year on such dates 
as may be designated without previous notice by the Comptrol- 
ler. They must also submit to periodic examinations — also 
unannounced — by bank examiners acting under the orders of 
the Comptroller and empowered to inquire into every detail cal- 
culated to throw light on the true condition of the bank exam- 
ined. Finally, the banks are divided into three classes — central 
reserve city banks (those of New York, Chicago, and St. Louis, 
on July I, 1903), reserve city banks, and others. The first 
class are required to keep continuously a resen^e in lawful 

*The minimnm capital in places of 50,000 or more inhabitants is 
$200,000. An amendment added in 1900 makes the minimum for 
places of 3000 inhabitants or less $25,000. 



Credit and Banking 



jf'aults in 
System 



money equal to 25 per cent, of their deposit liabilities.* The 
second class must also have a reserve of 25 per cent., but one- 
half of this may be kept on deposit with national banks in the 
central reserve cities. The reserve required of banks in the 
third class is only 15 per cent., and of this three-fifths may be 
kept on deposit with national banks in reserve cities. When- 
ever a bank's reserve falls below the legal minimum it is 
required to discontinue its discount business until the reserve 
is restored, and if this is not accomplished within thirty days 
it may be placed in the hands of a receiver. 

§ 190. On the whole, the banking system which has grown 
up under the regulations just described has more than justified 
the anticipations of its authors. National bank notes have 
proved a perfectly safe medium, of exchange, and depositors in 
national banks have lost surprisingly little as the result of bank 
failures since the system came into operation. There are, how- 
ever, two respects in which, in the opinion of most authorities, 
the system admits of improvement. These are in connection 
with the note-security and reserve requirements of the present 
law. 
Jnited The primary reason for permitting banks to issue notes is to 

Bank Notes enable them to supply the business community with a cheap and 

are Per- elastic medium of exchange in sections and for transactions for 

vcrsclv 

Elastic which checks are unavailable. The bank-note system of the 

United States is perversely elastic. Helpful elasticity results 
when banks are put in a position which makes it profitable for 
them to issue additional notes when more currency is needed, 
and to withdraw notes from circulation when the currency is 
redundant. One symptom of a need for currency, in districts 
which cannot make large use of checks against deposits as a 
medium of exchange, is the withdrawal of deposits, and this 
must force banks to raise their rate of interest unless they can 
meet the emergency by an issue of notes. A redundant cur- 
rency, on the other hand, is indicated by an increase in deposits. 
If the bank note currency is elastic it will expand to satisfy the 
increased demand for currency in the former case, and contract 

*This requirement does not apply to deposits of the United States 
Government in national banks, but the latter must be secured by 
bonds deposited with the Secretary of the Treasury. 



Freer Note Issue Necessary 341 

in the latter. This takes place under an unregulated banking 
system, but under the system of the United States, which 
requires, in addition to the 5 per cent, redemption fund 
deposit, a dollar-for-dollar bond deposit, a contraction in 
bank deposits makes profitable not the issue, but the with- 
drawal of notes. When deposits are being withdrawn a bank 
wishes to increase its available funds. It cannot do this in the 
United States by issuing bank notes, because for every one 
hundred dollars so issued more than one hundred dollars must 
be tied up in the premium bonds and redemption deposit re- 
quired as security. On the contrary, it can do it by withdraw- 
ing bank notes from circulation, because for ninety-five dollars 
in legal money sent to Washington for this purpose a bond that 
may be sold at once for more than one hundred dollars will be 
returned. It is only when the currency is already redundant 
that national banks are likely to find it profitable to increase 
their note issues. At such times they have unloaned money in 
their vaults. Investing this money in Government bonds which 
aiTord an interest and receiving back a nearly equal sum in 
bank notes may, under these circumstances, prove profitable. 
The tendency of bank notes under our national banking system 
is thus to contract when expansion is desirable, and to expand 
when the currency is already redundant. The system thus 
serves to intensify evils which a better system would help to 
cure. 

Space will not permit a detailed discussion of the remedies Freer 
that have been proposed for the defect just described, but it Neces^S^ 
is obvious that they must include modifications in the law cal- 
culated to give the country a less perfectly secured bank note. 
Only when the national banks are permitted to issue notes on 
something less than dollar-for-dollar security will they find it 
profitable to add to their circulation when more currency is 
needed, and to contract it when the medium of exchange is 
redundant. The protection of note-holders must be sought 
along the line of only slightly more stringent regulations than 
those which now protect depositors, if bank credit in the form 
of bank notes is to become as elastic an element in the 
medium of exchange as is already bank credit in the form of 
deposit accounts, against which checks may be drawn at wilL 



Defect 

in Reserve 
Require- 
ments 



State 
Banks 



342 Credit and Banking 

Canadian law permits Dominion banks to issue bank notes up 
to the full amount of their paid-in capital with the sole limita- 
tion that they must deposit 5 per cent, of the value of sucli 
notes in a redemption fund, for the maintenance of which they 
are jointly responsible. By adding to this collective responsi- 
bility the provision that bank notes shall constitute a first lien 
on the assets of failed banks, the law has given Canada an 
elastic bank-note currency under whicli not a single dollar has 
yet been lost by holders of the country's bank notes. There 
seems good reason to believe that a modification of this system 
o£ " asset currency " might be adopted in the United States 
with advantage both to the banks and to the public. 

The second defect referred to consists in permitting the 
reserves required by law of national banks in classes two and 
three to be deposited in part with other banks. To the extent 
that legal reserves are necessary, the}^ should be required with- 
out qualification of the banks for which the reserve is intended. 
The present system of the United States tends to concentrate a 
large part of the reserves of national banks in the national 
banks in central reserve cities, and especially in New York. 
Since the latter treat the deposits of other banks in much the 
same way that they do the deposits of individuals and maintain 
ordinarily only the 25 per cent, reserve against them required 
by law, the banking system of the whole country is exposed to 
serious danger whenever any unusual demand is brought to 
bear on the banks of New York. This concentration of respon- 
sibility for the whole credit system in the financial centre of 
the country is to some extent natural and inevitable, but it 
seems in the highest degree imprudent to deliberately encourage 
and extend it, as does the present law. Requiring each bank 
to keep in its own vaults its legal reserve would serve to foster 
conservative banking, whereas the present system conduces to 
recklessness and disregard on the part of the banks of their 
individual responsibility to their own depositors. 

§ 191. In addition to the national banks, of which there were 
on June 9, 1903, 4939 with an aggregate capital of $743,500,- 
000 and aggregate loans and discounts equal to $3,415,000,000^ 
there are in the United States an almost equal number of State 
banks and a large number of savings banks and trust com- 



Conclusion 343 

panics. The regulations in regard to State banks vary greatly. 
In several of the Eastern States (e. g., Massachusetts and New 
York) they are as rigid as those applying to national banks. 
Soch States have staffs of officials charged with the supervision 
of their banks, and the latter are in many instances as highly 
regarded as the national institutions with which they compete. 

Saving banks are institutions organised, as the term implies, Savings 
to encourage saving on the part of persons of limited incomes. 
lliey are often purely mutual institutions, the entire 
profits being distributed as interest to the depositors or accu- 
mulated as a surplus for the latter's protection. As a general 
rule, they receive only time deposits, on which they pay interest 
ranging in different sections of the country from 25^ to 4 
per cent. The law usually defines veiy narrowly the secur- 
ity on which they may make loans and the kinds of investments 
open to them. The aggregate deposits credited to the 1036 
savings banks in the United States on June 30, 1902, v/ere 
$2,650,000,000. 

Trust companies, althoug-h organised primarily for the ad- Trust 

r T , r , , ^ Companies 

mmistration of estates and other trust funds, have come to 

take a prominent part in the banking business of the country. 

Owing to their comparatively recent origin, they have not yet 

been subjected to as strict regulations as apply to State and 

national banks, and in consequence they are able to carry on 

their banking operations with greater freedom. In the financial 

centres of the country their growth in recent years has been 

phenomenal. On January i, 1903, in New York State alone 

they commanded a capital of $190,671,155 and deposits of 

$823,.797.853- 

§ 192. It would be difficult to exaggerate the importance of ConclustoR 

the services which credit, and especially bank credit in its 
various forms, renders the business community. Through the 
agency of banks a cheap and elastic medium of exchange is 
substituted for money, which is both costly and for many pur- 
poses inconvenient. They serve to gather together the small 
savings of thousands of persons, to whom they are of no imme- 
diate use, and to put them at the disposal of active entre- 
preneurs on terms which enable the latter to produce at a 
minimum of cost. Finally, they are the ready agents of the 



344 Credit and Banking 

Government and of great corporations when large sums of 
purchasing power are required, and carry through easily finan- 
cial operations which without their aid would be fraught with 
most serious consequences to the whole business world. Not- 
withstanding these services, there is in the United States a 
widespread distrust of banks and bankers, which has been re- 
flected more than once in Federal and State legislation. The 
impression is widely prevalent that while banks themselves reap 
large gains by lending their credit at interest, no corresponding 
benefits extend to those who borrow from banks. That this 
belief is vv^ithout foundation has been suggested in the preced- 
ing sections. In banking as in other branches of business 
competition is a force which compels a sharing of profits with 
the whole community. The more fully the banker is permitted 
to utilise his credit either in the form of deposit accounts or 
bank notes, the lower will be the rate of interest which he can 
afford to take for his services, and competition may be relied 
upon to force him to accept this lower rate. The guiding 
principle in connection with bank regulations should be to 
grant the fullest liberty that is compatible with a reasonable 
degree of security. Little fear need be entertained lest in the 
long run this liberty will not be used to advance the general 
good. 

REFERENCES FOR COLLATERAL READING 

In addition to the references given in the preceding chapter the follow- 
ing are suggested : * Dunbar, The Theory and History of Banking j 
Macleod, Theory and Practice of Banking ; Bolles, Practical Bank- 
ing ; *Conant, History of Modern Banks of Issue; Knox, History of 
Banking ; Hadley, Economics, Chap. VIII. 



CHAPTER XIX 
SOME UNSETTLED MONETARY PROBLEMS 

§ 193. Although the subject of money was one of the first to Unsettled 
engage the attention of economists and thousands of volumes ^° 
and pamphlets have been written concerning it, there is still 
great difference of opinion in regard to some of the problems 
which it presents. These have been styled " unsettled," to warn 
tlie reader that in this chapter controverted points are con- 
sidered and that he must be on his guard against accepting too 
readily the opinions of the author. The first problem relates 
to the factors which determine the value of money or — what is 
the same thing — the level of prices. 

The influences which connect the value of the dollar of the The Value 
United States with the value of 23.22 grains of gold have al- and Prices 
ready been explained.* So long as these continue active the 
gold standard must be maintained and " the value of money " 
will be merely another expression for the value of gold. Our 
problem reduces therefore to an explanation of the circum- 
stances which determine the value of gold. In previous chap- 
ters it has been shown that the value of any commodity depends 
transiently upon the temporary relation between the demand 
for it and its supply and in the long run on the more permanent 
influences which adjust the normal supply to the normal de- 
mand. The demand for a commodity springs from the various 
uses to which it is put. In the case of gold we may distinguish 
these as the industrial and arts uses which give rise to what we 
will call the " arts demand," the use as a medium of exchange 
which gives rise to the '' monetary demand " proper, and the 
use as a reserve of value for the redemption of credit money 
and credit instruments generally, which gives rise to a second- 
ary monetary demand, which we will call the " reserve de- 
mand." An increase in either of these three forms of demand 
♦Chapter XVII., Sections 175 and 176. 
345 



Demand 
for Gold 
in Arts 



Demand 



346 Some Unsettled Monetary Problems 

tends to increase the value of gold and incidentally to with- 
draw it from other uses to the use in connection with which 
the increase in demand has arisen. On the otlier hand, a de- 
crease in the supply of gold will tend to increase its value. Un- 
less the increased demand is balanced by an increased supply or 
the decreased supply by a decreased demand, the increase in 
value will actually occur and the level of prices will fall. 
Exactly opposite results, of course, follow a decrease in either 
form of demand or an increase in supply. 

§ 194. Although the demand for gold for different uses does 
not admit of exact measurement, something may be said in re- 
gard to the circumstances which cause it to vary. The prin- 
cipal source of the arts demand is the use of gold for ornament 
and display. With the progress of civilisation this demand is 
lessened as regards one section of the community, and in- 
creased as regards another. Highly developed men and women 
care little for gold jewelry, gold plate, etc., but on the other 
hand with the increase of general wealth these things are 
brought each year within the reach of less highly developed 
people who do care for them greatly. On the whole, the arts 
demand for gold is extremely elastic and gives no promise of 
decreasing relatively within the im.mediate future. 

The monetary demtand for gold depends upon the number of 
exchange transactions to be effected with gold coin as the 
medium of exchange. If this is thought of with reference to a 
particular period of time, as for example a week or a month, 
allowance must be made for the " rapidity of circulation," that 
is, the number of exchanges in which, on the average, each gold 
coin will figure within the period. Some writers speak of tlie 
rapidity of circulation as though it added to the supply of 
money, but it seems more logical to describe it as a cause 
lessening the demand. No one would think of an improve- 
Hent which doubled the speed at which trolley cars move 
through city streets as increasing the supply of such cars, and 
there seems as little reason to credit such influence to changes 
which increase the rapidity at which pieces of money circulate. 
Both serve to lessen the community's need for such conveni- 
ences for the accomplishment of given amounts of work. 

Much confusion in regard to the demand for money has re- 



Money and Credit 347 

suited from failure to discriminate between it and the demand Not 
for wealth in general. Command over money carries with it Unlimited 
command over wealth and this has led to the identification of 
the two. But it is equally true that command over any valu- 
able commodity, such as wheat or iron, carries with it com- 
mand over other valuable things, and yet no one would say, as 
economists of standing have said of money, that either of these 
is the one thing " of which no one ever has enough." * As a 
matter of fact the demand for money is as strictly limited as the 
demand for any other useful thing. Far from being the one 
thing " of which no one ever has enough," it is the one thing 
which people are most prompt to get rid of v/hen they receive 
it in any considerable quantity. No one wants to be cumbered 
with more money than he expects to need as a medium of 
exchange, and anything in excess of this is normally turned 
over to banks and other financial institutions and by them 
passed on to borrowers whose need for money is not entirely 
satisfied. Of course there are instances in which persons of 
disordered imagination have coveted gold for its own sake, but 
even misers of this type demand, in the economic sense, only 
so much gold as they can aftord to own, no matter how un- 
limited their desire for gold may be. 

§ 195. The number of exchange transactions to be effected Money 
in a community depends, of course, upon the amount of wealth ^" ^ 
produced and the organisation of production, that is, the extent 
to which a division of labour is carried out, the number of 
middle-men and speculators who intervene between producers 
and consumers, and the frequency with which ownership over 
the instruments of production and the stocks and bonds, which 
represent them, change hands. No one of these admits of 
statistical measurement, but this is because of the incomplete- 
ness of the available statistical data and not at all because they 
are not perfectly definite and measurable. Given the number 
of exchanges to be effected, the demand for gold to which they 
give rise depends upon the proportion of theni that are accom- 
plished by means of barter and by means of credit. In com- 
parison with credit, barter now plays such an insignificant role 
that its influence may be almost ignored. Som.e intimation 
* Professor William Smart in Studies in Economics, p. 145. 



348 Some Unsettled Monetary Problems 

was given in the preceding chapter of the extent to which credit 
now serves as a medium of exchange. It was there stated that 
probably one-half of the ordinary mercantile transactions that 
take place in the United States are effected by means of book 
credit. This is a m.ere guess, but somewhat more accurate 
data may be given in reference to the part played by forms of 
credit money and bank credit as m.edia of exchange. The 
statistics given in Chapter XVII., Section 175, indicate that 
more than one-half of the monetary stock of the United States 
is token and credit money, and experience and observatioii 
prove that it is this rather than gold coin that serves as the 
actual medium of exchange in nearly all transactions in which 
money is used. In other countries gold coin is more largely 
used, but in all, token and credit money are supplementary 
media of exchange. Tlie importance of bank credit in the 
United States is indicated by the following facts : According to 
the report of the Comptroller of the Currency the deposits in 
national banks on June 9, 1903, aggregated $4,628,000,000, of 
which $3,231,000,000 were the deposits of individuals. The 
volume of business which this and the deposit currency of State 
banks and trust companies is capable of accomplishing is in- 
dicated by the fact that in 1902 the total value of the checks 
which passed through the clearing houses of the country was 
$118,118,000,000. When it is remembered that in addition to 
this enormous total there was a considerable value of checks 
which failed to pass through the clearing houses, some notion 
is obtained of the extent to which the exchange business of the 
coimtry is affected by means of bank credit. These statistics 
for the United States are paralleled in other English-speaking: 
countries, and although the use of bank credit has been less 
highly developed by other peoples, there is no civilised nation 
in which it is not by far the most important single medium of, 
exchange. From this fact it results that the demand for gold, 
as a medium of exchange even in gold-standard countries is in 
ordinary times insignificant in comparison with the volume of 
exchange transactions eflFected. It follows also that this in- 
significant demand is capable in times of emergency, when the 
use of credit is contracted, of expanding to alarming pro- 
portions. 



The Reserve Demand 349 

§ 196. In consequence of the changing monetary policies of Recent 

leading commercial nations the monetary demand for gold has tions in 

been subject to remarkable variations during the last thirty Monetary 

T-, , 1 , 1,1,, 1 , Demand 

years. Each new country that has adopted the gold standard 

has been forced to secure, at whatever cost to itself, some share 
of the world's gold supply. This has given rise to a veritable 
" scramble for gold," which threatened for a time to have dis- 
astrous consequences. There seems to be every reason to think 
that this extreme competition for gold is nov/ over, and that the 
adoption of the gold standard by the few countries which have 
lagged behind in this movement will not increase the demand 
for gold unduly, for the simple reason that the entire monetary 
needs of these countries are sm.all. The monetary demand for 
that metal of countries already on the gold standard is likely, 
in consequence of the increased use of credit money and sub- 
stitutes for money that seems probable, to increase in coming 
years at a somewhat slower rate than their wealth and the re- 
sulting number of exchange transactions to be effected. Con- 
sidering the two sources of demand together, we may conclude 
with some confidence that the monetary demand for gold is not 
likely to increase in the immediate future — except as it is 
affected by temporary credit disturbances — ^more rapidly than 
does general wealth. 

§ 197. The reserve demand for gold includes not only the The 
demand of governments which have to provide for the redem.p- ^g^and 
tion of their token and credit money and of banking institutions 
which have their credit obligations to meet, but also the demand 
of individuals who wish for some reason to have by them a store 
of the precious metal. This demand has increased even more 
strikingly in the last thirty years than the monetary demand 
for the reason that most of the countries which have established 
the gold standard during that period, have contented them- 
selves, as has the United States, with securing sufficient gold to 
insure the convertibility of their other forms of money without 
actually withdrawing these from circulation. This has necessi- 
tated in all parts of the world the accumulation of large gold re- 
serves. 

The following figures give the gold holdings credited to 
the state banks of different countries about July i, 1903: Bank 



350 Some Unsettled Monetary Problems 

of France, $503,000,000; Bank of Russia, $373,000,000; Bank 
of Austria, $229,000,000; Bank of England, $184,000,000; 
Bank of Germany, $130,000,000; Bank of Italy, $73,000,000; 
Bank of Spain, $72,000,000 ; Bank of Belgium, $24,000,000 ; 
Bank of Holland, $20,000,000. The United States Treasury 
held on the same date some $252,000,000 and the national 
banks some $300,000,000 in gold. These gold hoards, which 
aggregated over $2,000,000,000, represent but a part of the 
world's reserve demand for gold, as they include neither the 
government's reserves in many important countries nor the re- 
serves in other than the State and national banks mentioned. 
If all of the different items which should be included could be 
exactly calculated, it would doubtless be found that the reserve 
demand for gold is larger than either of the other demands. 
This reserve demand, moreover, is likely to grow relatively to 
keep pace with the increasing use of credit as a medium of ex- 
change v/hich has been predicted. The time may indeed come, 
as it has already in the eastern cities of the United States, when 
the reserve demand for gold will practically supersede the 
monetary demand because the universal conviction that gold 
may be obtained at will in exchange for credit money will cause 
no one to want it. 

Conclusion To sum up what has been said in regard to the demand for 

in Refer- 

eace to gold, it appears that the arts demand is highly elastic and likely 

Demand j-q continue so for some time to come. The monetary demand 
which has expanded at a rapid rate during the last thirty years 
has now subsided to what we may describe as its normal con- 
dition, in consequence of the fact that the adoption of the gold 
standard by the commercial world is an accomplished fact. It 
is likely to increase in future years somewhat less rapidly — 
at least after the final steps in the adoption of the gold standard 
as the standard of the world have been taken — than the volume 
of exchange work to be done, because of the probable increase 
in the use that will be made of credit as a medium of exchange. 
The reserve demand which, too, has grown enormously during 
recent years has also attained, at present, a more normal con- 
dition. It is likely to increase relatively somewhat more than 
does the volume of exchange work to be done, to keep pace with 
the increased use of credit that is anticipated. Considering all 



The Supply of Gold 351 

three forms of demand together we may conclude that the de- 
mand for gold in coming years is likely to grow at about the 
same rate as the world's wealth, but that it will be subject to 
violent fluctuations until the machinery of credit is so perfected 
that it is no longer liable to the periodic break-downs whioil 
were so common during the last century. § ^^uruaMaU 

§ 198. The supply of gold admits of more exact measur^fe^fit' Th^'-Siiiijgifo 
than the demand for it. According to different author-itil^&'th^ ofjweMA ^d 
world's stock by 1850 equalled between ^2, 000, 000, ^4>&'^mm bvs-dmuVi 
$3,000,000,000. The production since that date hsd ^hi^\km6& 
to about $7,000,000,000, so the present stock isc^mhsb^-^^ 
tween $9,000,000,000 and $10,000,000,000. Tkel histtSi^^^ni^ 
gold production since 1850 is briefly summaris<ed jfiiPtllJi^l^UljW^ 
ing statistics: From 185 1 to i860 the anmhiilopriSJtociiarf^iav^iii 
aged $132,000,000, attaining in the lattef> ytax fthi^iie^la^QDf 
$i34,ooo,(X)0, which was not equalled 3fn3^i5ynMteetpi^t%r§aP 
until 1892. The lowest point was reach ed)iiisth^l8ari|r dightighl 
since when there has been a fairlyisteady/immealepassisifefeo^^as 
by the following table: .jdeud £ io ssinuol-^'ytdi bnsm 

q ]o fjoi c lo rlJnai-3no ,Ibod lo . 
World's Prq^^^n €^ <8feMibq svfl bnB ,rIiob 
Annual average, j-jjo588jfrj-§§f,jb ■MP'^mo,-w^mun xabni 

" jBb o^^^^W%":! Hjim^'^mmwoi adi juo 

" " 1891-1895, 163,000,000 

" " 1896-1900, 261,000,000 

OBunfil igoi, ■"isx^^odo,'^d6!"^'l 

.ioo noJ I = c>oi — Iboo noJ | = 

As these statf^fcs'iniliote, the i5f6duction W^old 'fesponded Probable 

but slightly ^^I8'^tft^e-^%^felsed mo^i^e^taly ?n"cl^i^|?v"e lemand l^'^Z 
Jqqoop^/irjoq $ = 001 .-rrfeqqooebm.toq 01 = of Gold 

prior to 1890. _Smce that (||te tlT(g^^esponse has been incg^as- Supply 
ingly adequate^: The largest pipodaction in any single yeaS- *© 
date ($315,000,000) was attained in 1899 on the eve of the 
SoiJjtfe) ^f?isll«fo WkF,3bite/tIfrfe!rd£ife ie¥ter-ybMdicat.^M>!^atrftliis 
xm^t^omM-d^^ aBfp0lss:fe(l3arEliTBmeaijifaittfCBre(Hrit^ftiai^i:^)W)^ 
tji^nj-ofi'jfojn $30piOQd^QbitoI$4jdjOiodo",oc5D<a'3^Ba^xwili bgQrtMrP^ 
tBjnfid.,at:Jkast gd/wrjagiiiifflrrpTBSEnfi] rdedaidani Whiit l^s'^vert-tftof & 
impoi^ot is3lhebl£act7 thdt 4telpr<Mbeti4)ifc^f?.'p:^l#"^^r<3fiii§e^ 

p, 40. .rn3,rlj a33v/lod bsnuaoo Dvsri jil-gini 



Measuring 
the Value 
of Money 
by Method 
of Index 
Numbers 



352 Some Unsettled Monetar}^ Problems 

to be more elastic, that is, to respond more readily to changes 
in the demand, in the future than it has been in the past. Be- 
fore enlarging on this point it will be well to consider the 
changes in the value of gold that have actually occurred in the 
recent past. 

§ 199. The value of money is measured, as is the value of 
anything else, by the quantity of other commodities for which 
it will exchange. When two periods are to be compared a 
difficulty arises because the value of money will be found 
usually to have changed in different directions as regards dif- 
ferent commodities. This is avoided by the method of index 
numbers. To illustrate its use, suppose that wheat, anthracite 
coal, pig iron, cotton cloth, and copper be taken as representa- 
tive of all commodities, and that it be found that on January 
I of a certain year one dollar would buy one bushel of wheat, 
one-fifth of a ton of anthracite coal, one-twentieth of a ton of 
pig iron, twenty yards of cotton cloth, and ten pounds of cop- 
per, while on January i of another year a dollar would com- 
mand three-fourths of a bushel of wheat, one-fourth of a ton 
of coal, one-tenth of a ton of pig iron, twenty-five yards of 
cloth, and five pounds of copper. Using one hundred as an 
index number for the different commodities we should write 
out the following tables for the two dates : 



January i, first year 
= I bushel wheat = 100 
= ^ ton coal — 100 

= -^ " iron = 100 

= 20 yards cloth = 100 
= 10 pounds copper= 100 
= 500 



January i, second year 
^i. = f bushel wheat = 
= ^ ton coal = 

= tV " iron = 

= 25 yards cloth = 
= 5 pounds copper = 



or $1. 



100 or ^i. 



75 
125 
200 
125 

50 
575 
"5 



The calculation indicates that the value of a dollar as meas- 
ured in these five commodities increased between the two dates 
from one hundred to one hundred and fifteen, or 15 per cent. 
By extending it to include all commodities, we could obtain 
similar averages for the two dates that would seem to give a 
comprehensive view of any change in the value of money that 
might have occurred between them. 



Price Statistics ' 353 

This method, called that of simple averages, is open to the Defects in 
objection that it treats all commodities as of equal importance ^ ^ 
in their influence on the value of money. It is obvious that 
there is chance of error when such diverse goods as coal and 
chewing gum are each given the same index number for the 
purpose of a calculation. To avoid this three different ex- 
pedients have been proposed : ( i ) to confine the calculation to 
the principal commodities which figure in a country's trade or 
consumption; (2) to assign different index numbers to differ- 
ent commodities, " weighted " so as to correspond to their dif- 
ferent degrees of importance; (3) to repeat important com- 
modities in different forms in the calculation so that they will 
have greater influence on the result than unimportant com- 
modities that appear but once. Space will not permit a de- 
tailed consideration of tlie merits of these different plans, but 
it may be said, in general, that experience shows that little 
change in the result is to be expected from their use and 
that the method of simple averages judiciously employed af- 
fords, perhaps, as accurate conclusions as such calculations 
admit of. 

In practice it is customary to study not changes in the value Relation 
of money, but changes in the level of prices, since prices are £fY^®®*l 
more readily available. The latter may be translated into the Money and 
former by means of a simple calculation since, as already ex- pfj^^s^ 
plained, they are in reciprocal relation to each other. To give 
a concrete example, suppose that a study of prices shows a rise 
of 25 per cent, in the general level during a given period. This 
signifies that commodities which formerly cost $1.00 will now 
cost on the average $1.25. This being the case, $1.00 will now 
purchase only four-fifths as much as it would before, or its 
value will have fallen one-fifth or 20 per cent. 

§ 200. During the last fifty years several elaborate investi- Price 
gations have been made designed to show changes in the gen- ^*^"S"<^s 
eral level of prices. For purpose of illustration the conclu- 
sions arrived at by two investigators, Mr. Sauerbeck, whose 
figures refer to English prices, and Professor Falkner, whose 
data were American prices, are represented in the accompany- 
ing chart. Mr. Sauerbeck's inquiry embraces 45 principal 
commodities and Professor Falkner's 223. Wholesale prices 



Reasons 
for Fluc- 
tuations in 
Prices 



354 Some Unsettled Monetary Problems 

were used in both cases and the method employed was that of 
simple averages.* 

A study of this chart reveals several interesting facts ia 
reference to the movement of prices since i860. Both inves- 
tigations indicate a considerable degree of variability in prices 
from year to year. Thus Mr. Sauerbeck's index number fell 
from 105 in 1864 to loi in 1865; from 1870 to 1871, it rose 
from 96 to 100, and from that to 109 in 1872; it fell from iii 
to 102 from 1873 to 1874, and from that to 96 in 1875 ; finally 
it rose from 68 in 1899 to 75 in 1900. Professor Falkner's in- 
dex number showed even more violent fluctuations : from 1861 
to 1862 it rose from 100.6 to 114.9, only to fall back to 102.4 i" 
1863; the rise in 1864 to 122.4 was more than balanced by the 
fall in 1865 to 100.3 ; ^^d this but prepared the way for a rise 
in 1866 to 136.3 ; subsequent changes were less violent, but from 
11867 to 1868 it fell from 127.9 ^o 115.9, and from 1875 to 1876 
from 1 13.4 to 104.8; other striking changes were the fall from 
99.9 to 86.7 from 1878 to 1879, and that from 86 to 79.3 from 
1883 to 1884. These sudden changes are accounted for in 
most cases by the variable use that was made of credit substi- 
tutes for money as media of exchange, complicated in the case 
of the American figures by the disturbing influence of the 
Civil War and of the depreciated paper currency which was 
the country's medium of exchange from 1861 to 1879. In 
times of general confidence credit plays such an important role 
in business that there is little monetary demand for gold and 
its value tends to fall — that is, gold prices tend to rise. Loss 
of confidence always causes a contraction of credit and an in- 
creased demand for standard money, which serves to enhance 
its value or to cause prices to fall. When the loss of confidence 
is general, as it was in 1873 ^-""^ ^^''^ years immediately follow- 
ing, the credit contraction is violent and the fall in prices cor- 
respondingly severe. Thus the use of credit, which in ordinary 
times is the source of so much benefit to the commercial world, 
becomes in times of disturbance the source of acute distress to 
all business men who have learned to depend upon it. 

* Professor Falkner also used the method of weighted averages. 
For a full discussion of these and other calculations, see Laughlin, 
Principles of Money, Chapter VI. 



Scale 
(Falkner) 



CHANGES IN GOL]| 

Falkner's Index Numbers, 1860-1891. 
(Prices in 1860=100) 





1860 


1861 


1862 


18H3 


1864 


1865 


1866 


1867 


1868 


1869 


1870 


1871 


1872 


1873 


1874 


1875 


1876 


1877 


1878 


I8T| 


10- 






















! 


1 






\ 


i 










1 


























136 
135 
























i 






1 














1 


/\ 
















































n 




















\y 


1 
















































\\ 




1 
















1 1 
























- 


133 
























rr 


















I 


\ 














































1 \ 


























i 


f 
















































i 




























♦ 
























130 
129 
128 
127 
125 
125 
124 
123 
122 


















A 










j 






















\ 






































/ 


N 




























T 


































^ 




s. 


k 
















{ 










\ 


































/ 






i 


V 


'"\ 














1 


i 


A 








\ 






























/ 














Si 








1 


^ 


A 








\ 




























,t 


f 












i 




T" 


s 










/ 


/ 


\ 








\ 
























V 


»n 


/ 




















\ 




V 


•^i, 














\ 








\ 














































\ 






K 




^ 




1 






\ 








\ 












































1 






! 


V 


/ 








\ 








\ 














































, 








1 


/ 










\, 








■^ 


"» 














121 


















il 






\ 






1 


f 












\ 










"*J 


^ 


\ 










120 


















f 








\ i 




i/ 












\ 


\ 


















1 1 9 


























\ 




1/ 
















\ 












\ 










1 17 


























V 




















\ 












\ 






























t 


1 






_V 






/ 
















\ 












\ 


































i 






\ 






^ t 


















^ 












\ 








114 
113 
112 
1 1 1 
1 10 
109 
108 
107 
105 
105 
104 
J 03 


















1 




j 






1 


\/ 




















\ 












\ 














1 












1 












\ 


/ 






















\ 












\ 


L 
















V 




























































\ 














/ 
















































\ 












N 














' 
















































\ 














k 
























, ' 














[ 




















\ 














V 








































































































































1 






































1 






1 






























\ 






















1 






1 




1 




1 


1 


1 














1 














\ 






















/ 






\ 


1 


1 


; 


1 


1 


I 
































■~- 


— , 


\ 
















/ 






\ 






! 




1 








































\ 
















/ 






) 


















































\ 










101 

100 

99 

98 








/ 


















1 




































\ 










- 


^ 












1 










'" 




































\ 










































































s, 




i 








































































\ 












































































\\ 


96 








































































































































































1 


























































,94 
93 


























































































































































92 






















































































































































90 












































































































































































1 


















































Rfi 






































































_ 



PRICES, 1860-1899. 

Sauerbeck's Index Numbers, 1860-1899 

(Average Prices, 1867-1877=100) „ Scale 

(Sauerbeck) 




(0 


1881 


1882 


1883 


1884 


1885 


1886 


1887 


1888 


1889 


1800 


1891 


1892 


1893 


1894 


1895 


1896 


1897 


1898 


1899 


1 1 1 

1 10 

109 

108 

107 

105 

105 

104 

103 

102 

101 

100 

99 

98 

97 

96 

95 

94- 

93 

92 

91 

90 

89 

88 

87 

86 

85 

84 

83 

82 

81 

30 

79 

78 

77 

76 

75 

74 

73 

72 

71 

70 

69 

68 

6 7' 

55 

65 

64 

63 

62 

61 

50 
































































































































































































































































































































































































































































































































































































































































































1 






-:^ai 


L-r 




"s 


In 


de;x- 


N 


lU 


ifc 


ex 


















































1 
























































J. 








1 1 1 


-s 


Ti"T 


JX 


-> 


-u 


nl 


lei 


'S— 


- 


















































■ u 








.. 


























































































































































































































































































































































































































































































































































































































































































































































































































































































































































1 
















































; 
















































































> 


t 
















































































s 


















































































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s. 


















































































\ 














































































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k. 


^ 












































































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\ 


s 


\ 




































































"s 




/ 






s 


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s 


/ 






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- 






\ 














































































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rV 






























































































































































































































































































































y 


\ 






























































1 
















\ 


\ 












































































\ 




V 














/■ 


.. 




* 


V 




















































1 




s 


b 










/ 


1 








\ 




















































\ 




\ 




y J 


1 










i. 




















































\ 






■u 


, 
^ 
















\ 




















































\ 










/ 


/' 




s 
















\ 
















































\ 


X 
















\ 




, 










\ 
















































































\ 


















} 






























































\ 
















J 














- 
















































\ 














/ 




























































^ 


•Si 










/ 






































































H. 


s. 


j>r 


r^ 















































































































































































International Bimetallism 355 

In addition to the yearly fluctuations recorded in the chart, The 
a general movement is discernible. The general trend of S^"®^^^ 
prices represented by both lines is upward from i860 to 1872 of Prices 
or 1873, and downward from that date until 1886 or 1887. The 
cause of the latter movement may with confidence be ascribed 
to the greatly increased monetary and reserve demand for gold 
during this period and the failure of production to respond in 
the measure that the situation demanded. The fall in prices 
made gold mining increasingly profitable and was checked 
after 1887 by the largely increased output of the world's gold 
mines. When the extraordinary demand for gold due to the 
adoption of the gold standard by different countries was satis- 
fied, prices began to rise, that is, the value of gold began to 
fall, and this has been the general trend since 1896 or 1897. 

It would be unsafe to base any exact conclusions upon the Statistics 
price fluctuations indicated by the chart, because neither one of ° ^^^ 
the investigations whose results it records is free from errors. 
In fact it is doubtful whether the statistical method has yet 
been perfected to a point which makes the exact measurement 
of the general level of prices, or the value of money, possible. 
All that is claimed for these investigations is that they reflect 
those general tendencies which were so marked as to overcome 
any possible margin of error in the calculations themselves. 

§ 201. The adoption of the single gold standard was vigor- Inter- 
ously opposed not only in the United States, but in European ^etallfsm* 
countries, on the ground that the supply of gold was inadequate 
to satisfy the needs of all nations. It was long contended, and 
is still by many thoughtful persons, that a much better mone- 
tary system for the world would be one which combined both 
gold and silver. Some countries, like England and her colonies, 
which had long had the gold standard might continue on that 
basis. Others, like Mexico and China, which were accustomed 
to silver only, might maintain the silver standard. The best 
interests of all would be served, it was thought, if the remain- 
ing countries which used both gold and silver could agree upon 
some scheme of '' international bimetallism " which would 
establish a fixed value ratio between gold and silver and insure 
their continued use as the standard money materials of the 
world. 



The 

Time for it 

Probably 

Passed 



The Silver 
Qnestion 
in the 
United 
States 



356 Some Unsettled Monetary Problems 

For a time it seemed as though the fears of bimetallists in 
reference to the insufficiency of the gold supply were well 
grounded. Gold prices did, as we have seen, fall with alarm- 
ing persistency, and the effect of the steady decline on the tem- 
per of the business community- was decidedly unfavourable. If 
the suggested remedy could have been applied in 1873, the 
results might have been generally beneficial. Nothing was 
done, however, notwithstanding repeated international confer- 
ences, and after 1896, when gold prices began to rise again, 
the principal reason for action was removed. At present it 
is the general consensus of opinion that " international bimet- 
allism," even if economically and politically practicable, is no 
longer needed and that any international agreement that is 
made should have for its object the extension of the gold stand- 
ard to the few countries that are still on silver and paper bases, 
with a view to giving greater stability to foreign exchange 
relations. In other words, gold has been accepted as tlie stand- 
ard of value of the world, and the monetary problem of con- 
temporary interest is how to extend this standard to countries 
which for special reasons do not care to make gold coin, even 
on a limited scale, their medium of exchange. The Govern- 
ment of India has solved this problem by acquiring a sufficient 
gold reserve to permit the sale at a fixed price in silver of 
English exchange, which represents gold, and by having the 
mint issue silver coins in exchange for gold on demand. By 
these means the convertibility of silver coin into gold at a 
fixed ratio is constantly maintained, and there seems no reason 
why a similar policy might not be adopted, by means perhaps 
of international agreement, by other countries preferring silver 
or paper as their media of exchange. 

§ 202. In the United States the agitation for bimetallism 
assumed a more radical form than in Europe, the demand 
being made that the country embark alone upon the attempt 
to maintain a constant value ratio beween gold and silver 
by throwing its mints open to the free coinage of the latter 
metal at the mint ratio of 16 to i. This was made the 
dominant issue in the presidential campaign of 1896, when 
the Republicans opposed to the Democratic declaration in 
favour of free coinage a somewhat vague endorsement of 



The Free Coinage of Silver 357 

mternational bimetallism. Again in 1900 free coinage was an 
issue, but already the reasons for the agitation had been with- 
drawn and there seems little likelihood of a revival of the 
question, at least in the same form. So fast has history been 
made in this field that what was but yesterday a burning 
political issue is now a question of merely academic interest. 
It seems worth while, nevertheless, to consider very briefly 
the probable consequences of the free coinage of silver, should 
such a policy be adopted. 

Since present credit relations are based on the gold standard, The 
there can be no doubt that the first effect of the proposed conse- 

policy would be a credit panic of unprecedented proportions, quences of 

. • til© FrcG 

Fear that credit obligations would be met in depreciated mone}'^ Coinage 

would cause all who have demand claims against others, to of Silver 
present them. Bank depositors would besiege the institutions 
to which they had entrusted their savings and the latter would 
be forced to suspend payments. At the same time every intel- 
ligent possessor of gold would decline to use it as money in 
the anticipation that it would go to a premium, and bankers 
and bullion brokers who did not have gold would hasten to 
secure it from the United States Treasury by presenting United 
States notes for redemption. Should the Government decline 
to pay out gold for its demand notes, gold would at once go to 
a premium. Should it pursue the other course, its gold reserve 
would soon be exhausted and the situation would then be 
beyond its control. Meantime the offer to convert silver bull- 
ion, worth at the outset less than fifty cents in gold, into dollars 
every whit as good as gold coin, would cause streams of silver 
to pour towards the United States mints from every quarter. 
The immediate effect of the policy would be to enhance the gold 
price of silver. Whether this enhancement would be sufficient 
to alter the present commercial ratio of i to 32-]- to the mint 
ratio of I to 16 and hold it there, is the crux of the whole ques- 
tion. On this point opinions differ widely, and there is no way 
of deciding the issue because only experience could demonstrate 
how large a part of the world's stock of silver would be con- 
verted into coin on such favourable term»s by its present holders. 
Doubtless there is much truth in the contention of bimetallists 
that the greater part of the silver in existence has already been 



358 Some Unsettled Monetary Problems 

enhanced in value by the art of silversmiths more than it would 
be by the new coinage policy of the United States, and that it 
would not occur to the owners of such silver to convert it into 
bullion even if the gold price of the latter was trebled instead 
of doubled. On the other hand, it is equally certain that a very 
large amount of silver is preserved in forms that add little to 
the value of their bullion contents. When it is recalled that 
the total gold monetary stock of the United States ($1,250,- 
000,000) could be replaced by silver in less than six years if 
the entire product of the world's mines were coined into dol- 
lars, and when it is considered what a stimulus silver mining 
would receive if the gold price of the metal were suddenly 
doubled, it must appear doubtful if the mint ratio could even 
temporarily be m.ade the world's commercial ratio and even 
more doubtful if this relation could be maintained. In the 
opinion of the writer, probability, so strong as to amount al- 
most to certainty, points to the conclusion that the free coin- 
age of silver would mean for the United States the single silver 
standard and a dollar worth considerably less than the present 
gold dollar. If this view is correct, arguments based on the 
alleged advantages of bimetallism have little bearing on the 
silver issue as it has presented itself in the United States. The 
alternative was between the gold standard and the silver stand- 
ard, and events have already shown the wisdom of the decision 
arrived at in the summer of 1896, to adhere to the former. 
The Future § 203. The future of the gold standard hinges upon the ques- 
Standard tions whether the value of gold is likely to show a fair degree 
of stability in coming years, and whether any more stable stand- 
ard which is equally convenient in other respects is attainable. 

As to the first point, present indications are believed to be 
very favourable. The transition to the gold standard has been 
accomplished, or is in a fair way to be accomplished in the 
near future, for the whole commercial world. Under these 
circumstances there is every reason to anticipate only that grad- 
ual increase in the v/orld's demand for gold that will result 
from the gradual growth of the world's wealth and expansion 
of its exchange transactions. On the side of supply, produc- 
^ tion in the near future promises not only to be ample, but to be 
governed more exactly by the normal cost of production than it 



The Multiple Standard 359 

ever has been in the past. Discoverie? of new sources of supply 
and inventions affecting methods of mining and refining have, 
during the last ten years, advanced gold production in many 
parts of the world to the precision of a manufacturing ii||3us- 
try. In quartz mining in the E.and district in South Africa 
and in placer mining in the low-grade gold-bearing soils, which 
it is now profitable to treat by m^eans of expensive hydraulic 
appliances, the cost of production of gold can be accurately 
estimated and the output can be increased or decreased on a 
considerable scale as changes in the value of the product 
make either course desirable. Thus the normal cost of pro- 
duction promises to be the regulator of the value of gold in the 
future, as it has been of other freely reproducible goods in the 
past. This normal cost of production may not change at 
exactly the same rate as does the normal cost of producing 
com.modities generally, but there seem.s to be good reason 
for believing that, in any case, it will change but gradualty 
and that a fair degree of stabiHty of value will consequently be 
maintained. 

§ 204. Those who believe that the gold standard will one The 
day be superseded base their faith, not on any alleged ad- oi i^ j 
vantage of some other commodity standard of value, but upon 
dissatisfaction with all commodity standards. Perfect stability 
of value is certainly unattainable along this line. The remedy 
suggested is the adoption of an immaterial standard, called the 
" multiple standard," whose value m,ay be kept uniform by arti- 
ficial regulation. The plan is somewhat as follows : Since 
the value of the monetary unit is determined by the relation 
between demand and supply, and since paper money is the 
medium of exchange preferred in the most advanced countries, 
let each Government take upon itself the regulation of its 
monetary system and substitute fiat for self-regulating monQj. 
Let a special department of issue and redemption be created 
to adjust the supply of such money to the demand for it in such 
a way that the general level of prices shall be kept uniform 
from month to month and year to year. This may be done, 
it is suggested, by issuing additional legal-tender paper notes 
as prices tend to fall and withdrawing such notes — perhaps 
hy the sale of low interest-bearing bonds — as prices rise. The 



360 Some Unsettled Monetary Problems 

measurement of prices might be made by means of index num- 
bers in some such way as was described in a previous section 
and the effort would be to keep the index number constantly 
at 100. 

Space will not permit discussion of the possibilities of a fiat, 
multiple-standard monetary system. There is, perhaps, no 
good theoretical reason for maintaining that such a system 
could not work in a world that was politically and commercially 
ready for it. On the other hand, no extended argument is 
necessary to show that at the present time the plan must be 
dismissed as impracticable, especially as there are grounds 
for doubting whether it would prove, in operation, as satis- 
factory as the single gold standard promises to be for the 
immediate future. 

REFERENCES FOR COLLATERAL READING 

The influences which determine the value of money are discussed 
with admirable clearness in */. F. Johnson's Synopsis of Lectures 
on Finance (Lectures IL-VL). With this should be compared the 
chapters on "The Quantity Theory" in Laughlin's Principles of 
Money, and Scotfs Money and Banking, in which contrary views 
are expressed. The most exhaustive discussion of the Measure- 
ment of General Exchange Value is in the work bearing that title 
by Walsh. See also, */evons. Studies in Currency and Finance, 
and Falkner, Report of Finance Committee of the Senate on Whole- 
sale Prices (1893). References for other topics considered in the 
chapter are : * Taussig, Silver Situation in the United States ; 
*Walker, International Bimetallism; Darwin, Bimetallism; 
* Sound Currency Redbook (published by Committee of New York 
Reform Club) ; Russell, International Monetary Conferences. 



CHAPTER XX 

FOREIGN EXCHANGE AND THE TARIFF QUESTION 

§ 205. In foreign as well as domestic trade credit now serves The 
as the principal medium of exchange. Those who purchase porefgn^^ 
goods from abroad pay for them by buying drafts^ or post- Exchange 
office, express, or cable money orders and sending the latter to 
the foreign seller, or by permitting the foreign seller to draw on 
them by means of drafts, or bills of exchange, for the sums due. 
Orders for the payment of money in a foreign country are 
called " foreign exchange," and the buying and selling of 
such exchange is, as already suggested, an important part of the 
business of a modem city bank. A description of the factors 
that enter into this business as it is conducted between the 
United States and the United Kingdom will serve to introduce 
a discussion of some of its more general aspects. 

Anglo-American trade now includes as varied transactions Anglo- 
as the trade between different sections of either country. In i^™^"'^*'* 
addition to commodities, stocks, bonds, and other securities are 
constantly dealt in betweep the two countries; profits, rents, 
interest, and even wages are transmitted; freight charges are 
paid ; travellers abroad receive remittances from home, and 
finally bankers' loans are exchanged. If these different trans- 
actions be looked at from the point of view of one of the coun- 
tries, say, of the United States, they arrange themselves underi 
two heads : those involving payments to the country and those! 
involving payments by the country. The first may be thought 
of as credits acquired by the United States. These arise from 
sales of commodities or securities, from payments in the way 
of profits, rents, interest, or wages due to Americans from the 
United Kingdom, from the expenditures of Englishmen in the 
United States, and finally from loans by English to American 
bankers. The second may be described as debts, and arise 
from the opposite transactions, e. g,, purchases of commodities 
or securities, loans to English bankers, etc. 

361 



Sterling 
Exchange 



The Gold 
Points 



362 Foreign Exchange and the Tariff 

For reasons which need not be enlarged upon, the custom has 
arisen of making London the clearing house for the credit 
instruments used in connection with foreign trade. Americans 
having payments to make in England usually buy drafts pay- 
able in London and transmit them to their creditors. Ameri- 
cans who are creditors of Englishmen, on the other hand, 
usually draw drafts or bills of exchange, payable in London, 
upon their debtors, in preference to waiting for the latter to 
remit. They sell these to bankers, who send them to their 
correspondents in London for collection. Orders for money 
payable in London are known as " sterling exchange " because 
they call for pounds sterling. If the orders for payments 
to English creditors are exactly offset by the orders for pay- 
ments by English debtors, the credit instruments which arise 
in connection with the various transactions described will just 
balance each other when they come together in London and no 
other medium of exchange than credit will be required. This 
outcome, where transactions are so vast, is, of course, very 
imusual. It more frequently happens that there is a balance 
either on the credit or on the debit side to be liquidated by 
means of some further transaction, 

§ 206. The price which American bankers ask for sterling 
exchange varies about $4.86 Yz per pound sterling, which is the 
equivalent in the gold coinage system of the United States of 
the pound sterling in the gold coinage system of the United 
Kingdom.* In consequence of the system of free and gratui- 
tous coinage in each country, $4.86^ in American gold coin is 
worth (approximately) a pound sterling in the United King- 
dom, while a sovereign of full weight is worth $4.86 Yz in the 
United States. The price of sterling exchange never departs 
far from $4.86 9^ , which we may call " par," for the simple 
reason that one alternative to employing sterling exchange as 
a means of payment is to ship gold, and this becomes profitable 
as soon as the price or rate departs from par sufficiently to 
cover the expense of shipment, which is now less than three 
cents a pound sterling, including freight and insurance. When 

* The sovereign (the gold coin corresponding to the pound) contains 
113. 001 grains of pure gold. Dividing this by 23.22, the gold contents 
of the American dollar, we get $4.86%. 



The Rate of Sterling Exchange 363 

the price rises above $4.86^ by three cents it becomes cheaper 
to remit btilhon to London than to pay the premium. In prac- 
tice, business men do not have to bother to remit, because com- 
petition between international bankers and buHion brokers 
causes gold to go out in anticipation of the high premium and 
the latter are willing to sell exchange, based on the bullion 
shipped, for such a small margin of profit, that shipments in 
small lots never pay. If the price of sterling fall below $4.86^ 
by three cents, it is more profitable for those having credit 
balances due in London to import the bullion for which these 
call. Competition among bullion brokers again insures a con- 
stant demand for good bills calling for payment in London at 
a minimum price of tliree cents below par, and relieves other 
business men of the trouble of importing gold. The limiting 
prices between which sterling exchange fluctuates are known 
among bullion brokers as the " gold points," the lower price 
resulting always in the shipment of gold to the United States, 
the upper in its shipment from the United States. 

§ 207. The rate of sterling exchange is determined from day The Rate 
to day by the relation between the demand for it and its supply. *^ ^hf ^'"^ 
All of the transactions which have been enumerated as belong- 
ing on the debit side, from the point of view of the United 
States, give rise to a demand for sterling. The supply comes 
from the transactions enumerated on the credit side. Interna- 
tional bankers and others who buy and sell foreign exchange 
try to adjust the rate so that the demand and supply will just 
offset each other. Excess on the side of supply causes the rate 
to fall, the limit being the lower gold point, at which credit is 
abandoned as a medium of exchange and gold is used instead. 
Excess on the side of demand causes the rate to rise, the limit 
here being the upper gold point, at which credit again is dis- 
carded and gold used. Gold thus serves as the medium in 
which international balances are settled when debits and credits 
do not exactly offset each other. 

Among the transactions which give rise to debits and credits The Rate 
the most sensitive are those we have characterised as bankers' and°^^^^*^ 
loans. Anglo-American banking houses, of which there are Foreign 
many, divide their banking capital between London and New ^^ ^"^® 
York. Self-interest leads them to keep the major part of this 



Prices of 
Stocks and 
Foreign 
Bxchange 



Frices of 
Commodi- 
ties and 
Foreign 
Exchange 



364 Foreign Exchange and the Tariff 

capital and of their entire loanable funds at that centre in which 
the higher rate of interest prevails. Suppose that for a time 
this centre happens to be New York — as it usually is. To take 
advantage of the high rate, bankers will wish to transfer their 
funds from London to the more profitable loan market. They 
will do this most cheaply by selling drafts on London so long 
as they can get a price for these drafts above the lower gold 
point. A rising rate of interest in New York thus serves to 
attract loanable funds from abroad, and these add to the supply 
of sterling bills. This cause may serve to add so largely to the 
supply that the rate of exchange is forced down to the lower 
gold point and a part of the transfer is effected by means of a 
shipment of gold. In fact, the Bank of England and the state 
banks of other countries v/hich are in a position to control the 
bank rate of interest commonly secure gold when they want it 
by raising their rates of discount until the rate of exchange 
is brought to the gold import point. 

A rising rate of interest in New York tends to add in still 
another way to the supply of sterling bills. An important item 
in the loan business of New York banks is loans to speculators 
and stock-brokers who invest the sums borrowed in stocks and 
bonds in the expectation of selling them at a profit. As 
the rate of interest rises the prospect of profit from purchasing 
securities with borrowed money is reduced. This lessens the 
demand for such securities, and thus tends to lower the prices 
at which they sell. One probable efifect of lower prices for 
securities is increased purchases on foreign account, and alf 
such purchases, of course, add to the supply of sterHng bills. 

More important in their aggregate effect, although less sensi- 
tive to temporary fluctuations in the rate of interest, are 
changes in the prices of the commodities that enter into foreign 
trade. Falling prices in the United States attract foreign 
buyers and their purchases add to the supply of sterling bills. 
Rising prices not only discourage foreign purchases, but 
stimulate purchases from abroad on the part of Americans^ 
thus adding to the demand for bills. The three influences 
mentioned — changes in bank rates of interest, changes in the 
prices of securities, and changes in the prices of commodities — ■ 
are not the only ones that affect demand and supply in rela- 



Three-cornered Exchanges 365 

tion to sterling exchange, but they are so much more im- 
portant than any others that the latter may be neglected. 

§ 208. The preceding discussion referring to sterling ex- Ways of 
change applies also to French, German, or any other species of po^ej^n 
foreign exchange in which the United States happens to be Exchange 
interested. There is, however, one circumstance that deserves 
notice because it is apt to cause confusion. The rate for foreign 
exchange between two countries may properly be quoted in 
terms of the currency of either. English or sterling exchange 
is habitually quoted in terms of American money. French 
exchange, on the contrary, is usually quoted in New York in 
terms of French money, that is, the number of francs and cen- 
times corresponding to an American dollar. Sterling exchange, 
as we have seen, is high or dear in the United States when it 
is above par and low or cheap when it is below par. French 
exchange, because quoted in French money, is high or dear 
when below par and low or cheap when above par. As French 
exchange rises the dollar becomes worth more francs or an 
order for francs in Paris becomes cheaper. Conversely, as it 
falls, an order for francs becomes dearer. It follows that 
whereas sterling exchange rises towards the point which 
makes the exportation of gold profitable, French exchange 
falls towards that point and vice versa. In London, American 
exchange is usually quoted in American money, that is, as 
sterling exchange. Consequently, from the English point of 
view a high rate for sterling means cheap exchange and the 
prospect of gold importation, or just the reverse of what it 
means from the American point of view. 

It is important to remember this complication in practice, Three- 

because the transactions of a country in different kinds of for- cornered 

, . • , 1 , ^ ,. . Exchanges 

eign exchange are mtmiately related. Credit is so much more 

economical than bullion as a medium of exchange that the latter 
is only shipped after all of the resources of credit have been 
exhausted. In the case of the United States some branches of 
its trade, as, for example, its trade with Brazil, call habitually 
for payments that are not offset by credits acquired in that 
country by Americans. Nevertheless, bullion is rarely shipped 
from the United States to Brazil, because it is quite as satisfac- 
tory to Brazilian bankers to receive sterling bills which add to 



Exchanges 

between 

Gold and 

Silver 

rStandard 

'"Countries 



A Country's 

Gold 

Supply 

Regulates 

Itself 



366 Foreign Exchange and the Tariff 

their credits in London, and on the basis of which they can 
sell drafts to BraziHan importers from Europe. Thus a three- 
cornered exchange of credit instruments serves to adjust bal- 
ances, which would otherwise necessitate the shipment of gold 
back and forth across the Atlantic. 

Another complication arises in connection with foreign ex- 
change when the monetary systems of the covmtries considered 
are not based on the same standard. Between the United 
States with its gold standard, and Mexico with its silver, or the 
Argentine Republic with its paper standard, there is no fixed 
par of exchange. The general principles regulating rates of 
exchange are the same in such cases as for two countries with 
the gold standard, but the range within which such rates may 
fluctuate admits of no precise definition. This is an incon- 
venience that will be avoided only when the gold standard has 
been universally adopted. 

§ 209. The importation or exportation of gold, which is the 
resort to which international bankers must have recourse when 
foreign credits and debits can be balanced by no cheaper means, 
causes a continuous redistribution of the world's supply of that 
metal. The last and most important point to note in the theory 
of foreign exchange is that this distribution is self-regulating 
and ahvays gives to each country that proportionate share of 
gold which is needed to keep its rate of interest and level of 
prices in their normal relation to those of other countries. Sup- 
pose the cause of the movement of gold from one country to 
another is a rising bank rate of interest in the latter. As gold 
pours in and is added to bank reserves it will tend to check 
such a rise, and meantime bank rates abroad, where bank 
reserves have been depleted, will tend to rise to re-establish the 
normal relation. If the cause of the higher rate in the gold-im- 
porting country was some temporary demand for bank loans, 
bankers will find their reserves too large when the emergency 
has passed, and will lower their rate of interest to attract bor- 
rowers. Before this process has gone far, an exportation of 
gold will be likely to set in to re-establish the balance. Sup- 
pose, again, that the importation of gold has been induced by 
the low prices at which commodities are being sold in the 
importing country. Such importation will before long itself 



The United States Exports Gold 367 

cause prices to rise, there being more money to serve as a 
medium of exchange than before, while the withdrawal of gold 
from other countries will in time cause their prices to fall. 
These results will follow the more promptly because ordinarily 
the new gold will find its way into bank reserves and will add 
to the use of credit as a medium of exchange much more 
largely than it adds to the country's supply of standard money. 
In the same way its exportation will serve ordinarily to reduce 
bank reserves and to cause a contraction of credit that will 
lessen the supply of media of exchange by much more than the 
amount of gold lost. By these means the movement of gold 
in one direction is soon checked with every likelihood that a 
counter movement will follow, unless the new distribution 
proves permanently satisfactory because of some increased 
need on the part of the importing country. 
/ It follows from the above considerations that the importation The 
I or exportation of gold is not a matter of any special importance states 
i either to the business community or to the government unless Should 
a country's monetary system is in an unsound condition. If Export 
gold is leaving a country, as it left the United States in 1893, Gold 
because its place is being taken by an excessive issue of credit 
money, grave uneasiness may well be felt. If, on the other 
hand, it is being imported because of a violent contraction of 
credit that has suddenly increased the demand for legal money 
as a means of payment, there is again ground for anxiety. 
Experience of movements of gold excited by causes like these 
has led American business men to attach exaggerated impor- 
tance to this phenomenon even when the reasons for it are per- 
fectly normal. There is widespread belief, inherited from the 
mercantilists of the eighteenth century, that to gain gold is an 
advantage and to lose it a disaster. Even in countries which 
produce no gold themselves there is no basis for this belief. 
They can count confidently on retaining their proportionate 
share of the world's gold so long as their money and credit 
systems are sound. For a country like the United States, 
which contributes each year more than one-fourth of the total 
addition to the world's gold supply, the belief is just the 
reverse of the fact. The normal condition for the United 
States is to export a part of its gold, as it exports part of its 



Foreign 

and 

Domestic 

Trade 

Compared 



Peculiari- 
ties of 
Foreign 
Trade 



368 Foreign Exchange and the Tariff 

cotton or wheat. If it fails to do so, the cause is likely to be 
found in some defect in the credit or monetary system which 
compels the country to retain more gold than is economical or 
desirable. 

§ 210. The difference between foreign and domestic trade is 
a difference of degree only. It happens that the continent of 
Europe is divided up between more than a dozen different sov- 
ereignties, and this causes trade between its different sections 
to be largely foreign. On the continent of North America, on 
the other hand, it happens that only three sovereignties are 
represented. Of these the United States alone controls an 
area nearly as large as the continent of Europe and presenting 
equally striking diversities of soil and climate. Trade between 
different sections of the United States is domestic, and yet the 
same considerations which, for example, cause California to 
produce oranges, lemons, and olives for the rest of the country, 
cause Italy to produce the same things for the rest of Europe. 
In both instances trade results from the efforts of men to realise 
the economies connected with a territorial division of labour, 
that is, to devote each particular area to those products for 
which it is best adapted, while securing from other areas by 
means of exchange their special products. 

Although foreign and domestic trade are thus controlled at 
bottom by identical principles, economists are in the habit of 
singling out the former for special treatment, partly because it 
is frequently subjected to regulations from which the latter is 
exempt, and partly because back of these regulations are dif- 
ferences in race, nationality, and political ideals which play 
their part in shaping economic conduct. One effect of the 
latter has already been noted, that is, the unreadiness of work- 
men to give up home and country for the sake of the higher 
earnings that may be obtained in other places. In consequence 
of this " immobility of labour," differences in wages between 
different countries persist generation after generation and play 
their part in shaping foreign trade. Differences in interest 
rates traceable to the immobility of capital, although less 
marked, are not without their influence also. 

The guiding principle which controls foreign trade is 
summed up in the statement that each country produces iot 



Principle Controlling Foreign Trade 369 / 

export those things which it can produce most cheaply, and PriDcip'ie 
imports in exchange those things which other countries can Porejon"^ 
produce most cheaply. In the absence of trade restrictions, the 'Trade 
capital and labour force of each country tends to be assigned 
to those branches of production for which it has the greatest 
natural or acquired aptitude. The selection is not determined 
absolutely, but by comparative standards. That is, one country- 
may have an absolute advantage over other countries for the 
production of hundreds of different commodities, but its inter- 
est and wage rates may be so much higher — in consequence 
of these very advantages — than those of the latter that i*- 
can produce more cheaply than they only the score or more 
of these commodities in which its superiority is most pro- 
jtiounced. 

Other countries also must find employment for their capital 
and labour and by submitting to lower interest and wage rates 
will be able to produce some commodities more cheaply, even 
though with greater expenditure of tim.e and effort, than the 
superior country. An illustration of the way in which a country 
may produce for export commodities which it cannot produce 
as easily as the importing country is afforded by the trade 
between the United States and Germany. The former imports 
from the latter cutlery, beet sugar, and several other commodi- 
ties which it could produce with less effort than their production 
in Germany costs. Such trade fs, nevertheless, mutually advan- 
tageous, because on the side of Germany it permits a utilisa- 
tion of capital and labour which yields larger returns in wheat, 
salt meat, and the other goods that are imported from the 
United States than could be secured by the direct production 
of these things, while on the side of the United States it enables 
the country to secure the commodities imported in exchange 
for wheat, salt meat, etc., with less expenditure of effort than 
would be involved in their production. The situation of a 
country is not unlike that of an individual. It has a limited 
force of labour and capital to employ and secures the largest 
return by concentrating these where they are most effective^ 
Just as it does not pay a successful lawyer to do his owr 
typewriting, no matter how expert a typewriter he may be, so 
it does not pay a country to do many things it could do more 



The 

Policy of 
Protection 



The Ad- 
vantages 
of Free 
Trade 



370 Foreign Exchange and the Tariff 

easily than its neighbours, because there are other things it 
can do still more easily and that, therefore, pay better. 

§ 211. As already stated, most countries subject their foreign 
trade to restrictions from which their domestic trade is exempt. 
This policy is called " protection," as its principal purpose is 
to protect home producers from foreign competition in the 
home market. How this may be accomplished by prohibiting ^^■ 
or taxing the importation of commodities that may be produced 
at home is obvious. As a preparation for discussing the argu- 
ments in favour of such restrictions we may profitably recall 
the advantages that are claimed for free trade. 

As pointed out in the preceding section, the chief purpose o£ 
foreign, as of domestic, trade is to render possible the division 
of labour and the economies connected with it. That this pur- 
pose will be most fully realised in connection with domestic 
trade, if free exchange is permitted, is generally conceded. 
Under such circumstances each individual will tend to devote 
his labour and capital to that pursuit for which he is best fitted 
and will obtain from other specialists, through exchange, the 
varied products he requires. Obstacles to free exchange pre- 
vent the full realisation of this division of labour by limiting 
the market for the products of specialists and thus compelling 
them to produce for themselves, or go without, some of the 
things they might otherwise obtain by exchange. But the same 
reasons that make free exchange within a country advantageous 
may be urged in favour of free trade between countries. Polit- 
ical boundaries do not alter the essential facts that trade is at 
bottom an exchange of goods for goods in which both parties 
are gainers, and that the freer the conditions of exchange the 
more highly will the division of labour be developed. Dififer- 
ences in the productive capacities of different countries fit some 
to produce some things, others others. If free trade is per- 
mitted, each will tend to produce only those things for which 
it is best adapted and to rely upon other countries for the other 
things desired and in the production of which the latter have 
a relative advantage. The consequence will be a larger joint 
produce and a larger share of wealth for each country than it 
could secure if compelled to produce for itself all of the things 
that its inhabitants require. If restrictions on trade are to be 



The Home-Market Argument 371 

approved, it must be because they accomplish results that com- 
pensate a country for the undoubted losses which they entail. 

§ 212. Some of the strongest arguments in favour of protec- History of 
tion apply to countries only at particular stages of their indus- protection 
trial development. For this reason and because it has been the United 
policy of the country almost since the beginning of its history, ^^^^^^ 
it will be profitable to discuss the subject of protection as it has 
gradually unfolded with the growth of the United States. In 
Chapter II., Section 13, attention was called to the connection 
between the ideal of national economic independence and the 
protective features in the first United States tariff (1789). 
During the period of trade restriction which preceded and ac- 
compained the war of 1812, this ideal was so far realised that 
other arguments for protection began to be advanced. The 
Tariff Act of 1816, the first highly protective tariff that the 
country had known, was defended more on the ground of pro- 
tecting industries already established than of building up new 
industries. In fact, the highest duties provided were to remain 
in force only three years, as it was believed that by that time 
American manufacturers v\/ould be adjusted to the conditions 
of peace and able to hold their own against foreign competi- 
tors. The erroneousness of this view was soon demonstrated 
and succeeding tariffs continued the protective policy, although 
with modifications, down to 1857. During this period the 
" vested-interests argument," the " home-market argument," 
and the " infant-industry argument " were those most fre- 
quently urged in support of protection.* 

The vested-interests plea needs no explanation. It is always 
urged by conservative people in favour of the continuance of 
an established policy, but does not pretend to throw any light 
upon the merits of a policy in itself. 

The home-market argument, as advanced by Henry Clay, The Home, 
the " father of the American System," as protection began to be Argument 
called, was designed to reconcile the interests of the agricul- 
tural South and West with those of the manufacturing North. 
It rested upon the proposition that the prosperity of the Ameri- 

*The material for this section and that which follows has been 
drawn largely from the author's article on Protection, in the New 
International Encyclopedia. 



372 Foreign Exchange and the Tariff 

can farmer depends upon a regular and constant market for his 
products, and tliat such a market is to be obtained only by 
building up manufacturing centres within the country. The 
experience of the years from 1816 to 1825 was cited to prove 
that the foreign market is not to be depended upon and farmers 
were exhorted to unite with manufacturers to establish a sys- 
tem which should bind different sections of the country together 
by furthering the interests of all. To the greater stability 
claimed for the home market — a quality now seriously ques- 
tioned by economists — later analysis has added another merit 
The home market calls not only for the staple products which 
will bear ocean transportation, but also for all kinds of perish- 
able goods. Substituting it for the foreign market renders 
possible diversified farming and enables cultivators to substi- 
tute for exhausting, one-crop systems of agriculture, rotations 
of crops which serv^e to preserve and perpetuate the fertile 
properties of the soil. This advantage is believed by protec- 
tionists to outweigh the admitted losses incidental to the pro- 
tective policy and to insure in the long run a greater degree 
of prosperity than will result from the free play of economic 
forces. 
The Infant- The infant-industry argument is the one to which economists 
Ar^ment usually concede greatest weight. It is urged in both a special 
and a general form. As it applies to special industries it rests 
on a recognition of the risks and difficulties which attend the 
domestication of new branches of production. In the success- 
ful prosecution of any industry three factors co-operate : the 
requisite natural resources, skilled and unskilled workmen of 
different grades, and the appropriate forms of capital. As re- 
gards each one of these, the country which has practised an in- 
dustry has a marked advantage over the country which has not 
The natural resources of the latter may be superior, but thej 
are undeveloped ; its labour force may be ample and adaptable, 
but it is untrained ; its people may be competent to use tools and 
machines, but they have no familiarity with the special forms 
of capital needed. Under such circumstances the encourage- 
ment of a protective tariff may suffice to induce investors to 
establish the new industry when without it they would not 
venture on such a step. After a few years, if the industry to 



Argument of List 373 

be domesticated has been wisely chosen, the initial difficulties 
will have been surmounted and the protective duty may be with- 
drawn without detriment to the now vigorous infant. Advo- 
cates of such a policy recognise quite clearly that resort to pro- 
tection entails a burden on consumers. They justify the 
temporary loss on the ground that the establishment of the 
new industry on a permanent footing will afford in the end a 
more than compensating gain. 

The infant-industry argument in its general form recognises Argument 
that countries must usually pass through different stages of ° ^ 
industrial development and advocates protection as a means of 
accelerating progress during periods of transition from one 
stage to another. The best statement of this argument is that 
given by Friedrich List in his Das nationale System der 
■politischen Oekonomie, which appeared in 1841. The conclu- 
sions at which List arrived were based on the contrast between 
an industrial country like England and an agricultural coun- 
try, such as Germany was at the time he wrote. In his opinion 
England's success as a manufacturing country was due chiefly 
to the development of certain industrial qualities among her 
people. Germany, he thought, might develop the same quali- 
ties among Germans by means of a protective policy which 
would force them to manufacture for themselves. Through 
protection the natural resources of the country necessary to the 
development of manufacturing would also be opened to exploi- 
tation. From this point of view protection is a temporary 
means by which an agricultural country may transform itself 
into an industrial country. After the transformation is com- 
pleted the new manufacturing industries, or at least a great 
many of them, will be quite capable of holding their own in 
competition with the manufacturing industries of other coun- 
tries and protection vAW no longer be required. 

§ 213. The last stage in the development of the protective Protectioa 
policy of the United States has been the outgrowth of the Civil y^^^^j 
War. That struggle involved the v/ithdrawal from Congress States 
of the representatives of the Southern States who had been the ^^^^ ^^ 
most active opponents of protection. Under the guidance of 
representatives from the North successive tariffs were passed 
carrying the policy to the most extreme lengths which the 



374 Foreign Exchange and the Tariff 

country had known. Factors in this development were the 
anti-foreign sentiment which resulted from, the somewhat hos- 
tile attitude of Europe to the cause of the North, and the com- 
prehensive system of internal revenue taxation adopted 
during the War, which had to be offset by higher import duties 
if Americans were not to be placed at a disadvantage in com- 
petition with foreign producers. The change in the level of 
duties which resulted from this combination of circumstances 
is indicated by the fact that whereas under the Act of 1857 the 
highest duties imposed were 24 per cent, ad valorem,'^ under 
the Act of 1864 the average rate of duty on dutiable articles 
was over 47 per cent. During the first fifteen years after the 
close of the war the attention of Congress was occupied by 
questions of reconstruction, the resumption of specie payments, 
etc., and no change of im.portance was made in the tariff except 
that it became increasingly protective as the internal revenue 
duties were one by one removed. When attention was again 
concentrated upon the tariff question the protectionists were 
still in control of Congress. The tariffs of 1883 and 1890 were 
both modifications in the direction of higher duties. The Act 
of 1894 was a reactionary measure, but was so garbled in its 
passage through Congress that the tariff-reform President of 
the period, Mr. Cleveland, allowed it to become a law without 
his signature. The victory of the Republicans in 1896, although 
little related to the tariff issue, involved as an incident a return 
to a highly protective policy. In fact the Dingley Act of 1897 
marks the extreme limit to which that policy has been carried 
in the United States. 

The Wages During this last period at least one new argument of im- 
Argument , , , . r . ,• .1 « 

-portance was advanced m support of protection, the wages 

argument." Before protection became the settled policy of the 

country, one of the reasons urged in its favour was that, since 

wages were higher in the United States than abroad, some 

special encouragement was necessar}' to the introduction of new 

industries to enable employers to com.pete v/ith the low-wage 

labour of Europe. After protection became a settled fact, by an 

* Ad valorem duties, or duties based on value, are to be contrasted 
with specific duties based on quantity {e. g., so much a pound or a 
bushel). 



Political Ideal of Protectionists 375 

interesting inversion, it began to be given credit for the high 
wages of American labour. The wages argument runs as fol- 
lows : In protected industries higher wages are paid in the 
United States than in similar industries abroad. Protection, 
therefore, causes high wages, and its withdrawal must tend to 
pauperise American labour. This overlooks certain important 
considerations. First, equally high wages are paid in unpro- 
tected as in protected industries, and the former, which in the 
United States include farming, mining, transportation, and 
many branches of manufacturing, vastly exceed the latter 
in importance and magnitude. Second, employers, whether i 
protected or unprotected, desire to secure their labour i 
as cheaply as they can and there is nothing in a pro- 1 
tective tariff which forces them to pay higher wages than 
are current in the community in which the protected 
industries are located. In other words, employers in pro- 
tected industries pay the wages they must to get the labour 
they require, and these depend not upon the protective tariff, 
but upon general industrial conditions. Third, it is not true 
that high wages and protection always go together. For 
example, wages in protectionist Germany are lower than in 
free-trade England. For these reasons the wages argument, / 
although effective for campaign purposes, has never enjoyed | 
much repute among trained economists. ' 

Even more influential than the economic arguments in Political 

T 1 1 f 

favour of protection that have been reviewed, has been the p^-o^ec^/ 
ambition of American statesmen to cement the bonds which tionists 
unite different sections of the country by means of a tariff 
which should make them mxUtually dependent and at the same 
time independent of Europe. This was to be accomplished 
by developing the division of labour to the highest point within 
the country, without giving any encouragement to the inter- 
national division of labour upon which foreign trade rests. 
Horace Greeley, the influential editor of the New York 
Tribune, expressed this view of protection with his usual clear- 
ness in the following declaration : * " If I had my way I would 
put a duty of $ioo a ton on pig iron, and a proportionate duty 

* Interview of Horace Greeley with President Garfield (1881), quoted 
from Dewey's Financial History of the United States, p. 397. 



of 1897 



376 Foreign Exchange and the Tariff 

on everything else that can be produced in America. The re- 
sult would be that our people would be obliged to supply their 
own wants, manufactures would spring up, competition would 
finally reduce prices and we would live wholly within our- 
selves." From this point of view the chief function of pro- 
tection is to serve as a Chinese wall to preserve the United 
States from the contamination of foreign influences. Un- 
economic as such an ideal must appear, it cannot be doubted 
that it makes a strong appeal to many patriotic citizens. But 
for it tariff controversies in the United States would have had 
little of the moral earnestness which has characterised them 
whenever protection has been the issue. 
The^Tariff §214. A brief description of the tariff of 1897, still (July i, 
1903) in force in the United States, will serve to emphasise 
one argument against protection — that is, its complexity. The 
act in which this tariff is embodied covers seventy octavo pages 
and enumerates upwards of 3500 different articles of which 
som.e 350 are admitted into the country free of duty and the re- 
mainder are subject to taxation. There are fourteen different 
schedules (lettered "A" to " N ") under which dutiable 
articles are classified. Schedule " K," embracing " wool and 
manufactures of wool," is fairly typical. In it wool is di- 
vided into three elaborately distinguished classes to each of 
which a special duty is applied. Wools of classes one and two 
are taxed eleven and twelve cents a pound respectively. Wool 
of class three, worth less than twelve cents a pound, is taxed 
four cents and, worth more, seven cents a pound. The rate of 
taxation on the cheaper grades is thus from 33 Y?, per cent, to 
58 per cent. These duties are intended, of course, to protect 
farmers and ranchers engaged in the production of wool. To 
protect manufacturers of woollen goods it is necessary to com- 
pensate them for the higher prices they have to pay for 
protected wool as well as to protect them against foreign man- 
ufacturers. The tariff accomiplishes this object by subject- 
ing woollen goods to both a specific and an ad valorem 
duty. For example woollen yarn, if made of wool worth 
less than thirty cents a pound, pays a specific duty on each 
pound equal to two and one-half times, and, if of wool 
worth more, to three and one-half times, the per pound duty 



The Burden of Protection 377 

on wool of the first class, and in addition an ad valorem 
duty equal to 40 per cent. Similar mixed duties apply to 
woollen cloths of all kinds, with the consequence that the 
tax on consumers of imported woollen goods is very heavy. 
According to the returns of the customs office for the year 
ending June 30, 1902, the average rate of duty on wool im- 
ported during that year was 59 per cent, and the average rate 
on the manufactures of v;ool 92 per cent. The rates on other 
textiles, the raw materials of which do not require protection, 
are of course less extreme, but the returns indicate that the 
average rate on imported cotton goods during the same year 
was 55 per cent., and on imported silk goods 54 per cent. 

The above duties on textile goods are among the highest The 
protective duties on the list, being exceeded only by the duties pro^^c^jon 
on china and glass ware, which averaged 59 per cent. The 
general average on all dutiable articles was, however, nearly 
50 per cent, in the year referred to, so that the duties cited give 
no exaggerated picture of the burden of taxation which re- 
sults from the protective system. Nor is this burden ade- 
quately represented by the statement that consumers of im- 
ported commodities which compete with American products 
must pay on the average 50 per cent, more than such products 
are worth abroad. Much heavier is the burden which results 
from the exclusion of foreign products and the enhancement 
of the prices of American goods. The higher prices that con- 
sumers must pay for protected goods in order that they may] 
be produced at home afford no revenue to the Government, al- 
though they add so largely to the expense of living in the| 
United States. 

Space will not permit a description of other features of the Complexitj 
tariff. The complexity of the wool schedule is matched in the tariff 
schedules applying to the metals, to wodd and manufactures of Question 
wood, to silk goods, etc. To fully master any one of these 
schedules and determine what rates of duty would afford ade- 
quate protection without unduly burdening consumers would 
require months of study of the industries affected, both at 
home and abroad. To fully master all of them, with the three 
thousand odd different articles to which they refer, is a task 
beyond human capacity. Needless to say, Congress in drafting 



Present 
Status of 
the Tariff 
Question 
in the 
United 
States 



378 Foreign Exchange and the Tariff 

tariff bills makes no such ambitious attempt. Instead, it con- 
tents itself with taking the testimony of interested persons as 
to the amount of protection their businesses require, and accepts 
their statements as its guide in apportioning protection to dif- 
ferent industries. The bill so prepared by the Committee of 
Ways and Means in the House of Representatives is submitted 
to a running fire of criticism and amendment in both Houses, 
and when finally passed is such a hodge-podge of compromises 
that even the m.ost earnest advocates of protection are usually 
forced to express regret that a better measure could not be 
secured. The complexity of a protective tariff, with its thou- 
sands of items and its confusing medley of ad valorem and 
specific duties, applying often to the same commodities, is in 
striking contrast with a tariff for revenue only like that of the 
United Kingdom. The latter contains but a few items, and 
since it serves no special interest, except that of the Govern- 
ment, may be drawn up in a simple and business-like way. 
Its financial results can be foretold with a high degree of pre- 
cision, and its capacity to yield revenue is even greater than 
that of the more burdensome protective tariff because it con- 
fines itself to articles that are widely consumed. 

§ 215. Arguments in favour of protection ought to be care- 
fully weighed against the general argument in favour of free 
trade, not as abstract propositions, but with reference to the 
concrete circumstances of each particular country. The result 
of such a procedure applied to the present industrial situation 
of the United States is, in the opinion of the author, decidedly 
unfavourable to the claims of protectionists. National economic 
independence, the first and perhaps the strongest reason urged 
in support of protection, has long since been achieved and 
would not be endangered in the slightest degree by a change of 
trade policy. The vested-interests argument is of weight as a 
plea against a too hasty reduction of duties upon which impor- 
tant industries have come to depend, but cannot justify the in- 
definite continuance of such duties if they no longer serve the 
best interests of the Y\ihole country. The home-market argu- 
ment has little application to the present situation, when such a 
large proportion of the staple products of the country seek the 
foreign consumer in defiance of the tariff and when the conse- 



The Strength of Protection 379 

quence of the latter is too often tariff retaliation on the part of 
other countries much more unsettling in its effects than fluc- 
tuations in foreign demand, independent of hostile tariffs, 
could possibly be. The infant-industry argument in its 
special form is now applicable to but few American industries, 
v^hile in its general form it has certainly been outgrown by a 
country whose manufactured products already com.pete success- 
fully for a share of the foreign market. Finally, the wages 
argument inverts the true relation between protection and 
high wages. High wages are due, as explained in a previous 
chapter, to the high productiveness of labour, due, in turn, to 
the superior natural resources of a country, its abundant and 
efficient equipment of capital goods, and the capacity of its 
entrepreneurs and wage-earners. It is because of high wages 
that protection is necessary to the maintenance of certain indus- 
tries in the United States. Without it goods now produced 
in the country would be imported and paid for by increased 
production in those lines of industry which need no protection. 
Since labour and capital are more productive in unprotected 
than in protected industries, the withdrawal of protection 
and the concentration of labour and capital in the former 
might be expected, time being allowed for the necessary 
readjustment, not to lower wages, but to raise them. Cer- 
tainly more wealth would be produced under the new arrange- 
ment, and labour's chance of getting a larger share would 
seem as good as that of any other factor in production. 
Thus instead of raising wages, protection serves on the whole 
to lower them and is itself necessary because wages were al- 
ready high before it was introduced. The case for protection 
thus appears on every count to be decidedly weak in compari- 
son with the case for free trade. If the issue were to be 
decided solely on grounds of economic reasoning, it is believed 
that the policy of protection would be quickly abandoned. 

The present strength of protection in the United States rests, The 
however, less on reasoning than on sentiment and experience, pr'cftectioa 
The all-important fact that cannot be argued out of the mind 
of the practical business man is that protection has been the 
policy of the country during a period of remarkable industrial 
prosperity. That this has been an accident he will not believe. 



Opposition 
to Protec- 
tion to 
Trusts 



Folly of 
Protecting 
Exploita- 
tion of 
Limited 
Natural 
Resources 



380 Foreign Exchange and the Tariff 

or at any rate he prefers to " let well enough alone," and to 
refrain from disturbing a system which may have had some- 
thing to do with the country's undoubted progress. Under 
these circumstances the policy of protection is likely to be 
adhered to as long as prosperity continues, or until those whose 
interests would be directly furthered by free trade organise 
as effectively to oppose protection as interested manufacturers 
are already organised to maintain it. 

§ 216. According to the general argument for free trade, it 
is the consuming public, which has to pay higher prices for 
protected goods, that is most injured by protection. But the 
consuming public constitutes no definite class and its organi- 
sation as a party of opposition is highly improbable. At certain 
points, however, the protective tariff of the United States is 
already subject to vigorous attack by particular consumers^ 
One of these is where it acts as a shield for the combinations 
of manufacturers or trusts discussed in Chapter XXV. Indi- 
cations are not lacking that the first breaches in the American 
tariff wall will be through lowered duties on trust-made goods. 

Another aspect of protection that is beginning to receive 
merited condemnation is its tendency to hasten the destruction 
of limited natural resources. In the United States important 
branches of mining, such as coal and iron, are protected, in 
utter disregard of the fact that this forces the country to use 
up its own lim.ited supplies of these indispensable materials 
when it might, in the absence of the tariff, secure at least a part 
of what it needs from neighbouring countries. Protection is 
also extended to the lumber industry, although it is notorious 
that the destruction of American forests is progressing at a rate 
that threatens grave injury even to the present generation. It 
seems too clear for argument that wise national policy demands 
the conservation rather than the destruction of limited natural 
resources such as those mentioned. When a revision of the 
present tariff is undertaken, this aspect of the subject is sure 
to be impressed upon Congress, and there is reason to hope that 
these most objectionable protective duties may be repealed. 

Somewhat less direct than the burden protection imposes on 
consumers is the injury which it does to producers for the for- 
eign market. They suffer in both a general and a special way» 



The Future 381 

In general, protection, by curtailing imports, curtails the for- The 

eign demand for native products, or exports. This must be the protection 

case, for in the long run imports and exports pay for each to Pro- 

diicGrs for 

(other. A country which will not take the products of Export 
other countries cannot sell to them. For a short time they 
may pay in specie for what they cannot pay for in goods, 
but as pointed out in Section 209, the exportation of gold 
must soon be checked automatically by changes in interest 
rates and price levels. Thus the policy of excluding foreign 
goods from the home market in order that home industries 
may develop to satisfy its needs, is, from the point of view 
of producers for export, a policy of repression rather than 
of protection. To the same extent that the home market 
is wrested from foreigners and given to protected home 
producers, the foreign market is wrested from unprotected I 

home producers. The latter have good reason for complaining 
that discrimination in favour of industries which need protec- 
tion is discrimination against them. Until recently, the indus- 
tries in the United States which produced for export have been 
the great extractive industries. Now that manufacturers also 
are beginning to look to the foreign market for their customers, 
this adverse side of protection, to which they seem to have 
been blind in the past, is likely to receive its proper share of 
consideration. 

The special grievance which producers for export urge Retaliatory 
against protection is that it antagonises foreigTi governments ^ ^^ 
and leads to retaliatory measures. Protection is a game at 
which two can play and which loses much of its interest when 
participated in too widely. The United States has already been 
the object of tariff retaliation on the part of Germany and 
Russia, and if the temper evinced by the foreign press is any 
criterion, its troubles from this source are only just beginning. 

The future of protection in the United States is uncertain, as The Future 
must be the future of any political policy, but there seems rea- 
son to believe that the trend of events is away from, rather than 
towards trade restrictions. Protection, as the term implies, is a 
policy for the weak rather than for the strong. As the United 
States becomes conscious of its industrial strength it is likely 
to tear down its protective barriers and enter the field of free 



382 Foreign Exchange and the Tariff 

international competition in the same confident spirit as did the 
United Kingdom half a century ago. 
Free Trade § 217. Notwithstanding the strength of the arguments 
against protection stated in the preceding sections, it has been 
and still is, with few exceptions, the policy of nations. Among 
the exceptions the most notable is the United Kingdom, and 
this makes a brief account of the trade policy of that country 
of particular interest. As used in current discussions, " free 
trade" means, not perfectly free exchange between nations, but 
exchange restricted only by moderate revenue duties. It was 
such free trade that the British Parliament decided to introduce 
in 1846 and that was fully realised in the tariff adopted in i860. 
The Pres- The present trade policy of the United Kingdom may be 

Policy of summed up in the following propositions : ( i ) No restrictions 
the United whatever are imposed upon exports, except a temporary war 
revenue duty of one shilling a ton on coal; (2) import duties 
are imposed only on the following articles, all others being ad- 
mitted free, viz., cocoa, coffee, chicory, dried fruit, tea, tobacco, 
wine, beer, spirits, and sugar; (3) to prevent these duties from 
oifering any special encouragement to home as distinguished 
from foreign producers, the production in the United Kingdom 
of such of the articles as might be there produced is either pro- 
hibited, as in the case of tobacco, or subjected to exactly equiva- 
lent internal revenue duties, as in the case of beer and spirits. 
The policy thus opposes no obstacle to the prosecution within 
the United Kingdom of those industries for which the country 
is adapted, v/hile it affords to home producers no advantages 
over their foreign competitors in production for the home m.ar- 
ket except those which nearness to that market and better 
acquaintance with its requirem.ents always give. 
The § 218. For a time, after the United Kingdom adopted a free- 

M^oveme^t^ trade policy, it seemed as though other European states 
i36b-i87o would follow her example. France entered into a series of 
commercial treaties, beginning with the Anglo-French treaty 
of i860, which made her trade policy exceedingly liberal. 
Meantime the ZoUverein, or tariff union, which had been 
organised by the states of Northern and Central Germany from 
1831 to 1835, was moving, under the leadership of Prussia, in 
the direction of a tariff for revenue only. 



The Present Outlook Abroad 383 

The national animosities which grew out of the Franco- The Pro- 
Prussian War (1870-71) checked the hberal movement, and Reaction 
the latest changes in European tariffs have been decidedly away 
from free trade. The reaction in Germany was signalised by 
the enactment of the moderately protective tariff of 1879. The 
French tariff of 1881, which substituted specific for ad valorem 
duties, was also moderately protective in its tendencies. Subse- 
quent tariffs, notably that of France, adopted in 1892, and that 
of Germany, adopted in 1902, advanced the policy of protec- 
tion to more extreme lengths in both countries, and are fairly 
typical of the tariff legislation of European nations generally 
during recent years. Only Belgium and Holland have held 
aloof from the movement towards protection, and even by them 
free trade is not realised to the same extent that it is by the 
United Kingdom. 

The war of protective tariffs which is now in progress in The Pres- 
Europe is doing more than could any amount of argument to Abroad 
discredit that policy. Statesmen in all countries are beginning 
to appreciate that however advantageous protection might be 
if one country could practise it all by itself, it is suicidal when 
pursued to its logical limit, that is, the entire exclusion of all 
products that may be produced at home, by all countries to- 
gether. The United States, with its varied natural resources, 
may pursue such a policy and prosper, but this is not possible 
for one of the countries of Europe. It may take time for this 
conviction to win general assent, but that it is gaining ground 
is evinced by the agitation for enlarging the boundaries of the 
protected areas. Tariff unions similar to the German Zoll- 
verein are now being considered on the one hand for the whole 
continent of Europe, and on the other for the whole British 
empii-e. That such unions will be formed is highly improb- 
able, but that the same arguments that are urged in their 
favour may be advanced with even more cogency in support of 
a policy of general free trade must be admitted by all who have 
followed the tariff controversy. 

REFERENCES FOR COLLATERAL READING 

Scott, Money and Banking, Chap. XII.; Goschen, The Theory of the 
Foreign Exchanges ; '^Clare, The A B C of the Foreign Exchanges ; 



384 Foreign Exchange and the Tariff 

*Pierson, Principles of Economics, Part II. Chap. III.; *Bastabte, 
The Theory of International Trade ; Fatt/cett, Free Trade and 
Protection ; Sumner, Lectures on the History of Protectionism in 
the United States ; * Patten, The Economic Basis of Protection ; 
Thompson, Protection of Home Industry ; * Taussig, Tariff History 
of the United States, and State Papers and Speeches on the Tariff ; 
Stanwood, American Tariff Controversies in the Nineteenth 
Century. 



CHAPTER XXI 
THE LABOUR MOVEMENT 

§ 219. The treatment of wages in the chapter on that topic Obstacles, 
was open to the charge of being unduly abstract The assump- com^ti- 
tion that competition has free play between workmen and em- tion in the 
ployers involves a disregard of palpable facts and must, for Market 
many readers, have weakened the force of the conclusion that 
under such circumstances workmen of the same grades of 
capacity tend to secure the same rates of wages in each labour 
market and that in general these rates tend to be the shares of 
the joint product that are economically imputable to labour as 
distinguished from the other factors in production. We must 
now give full weight to the undoubted fact that competition 
in the labour markets of the world is not free and all-sided, as 
assumed, but obstructed in various ways, and consider how this 
modifies our conclusions in reference to the relation between 
work and pay. 

The wages contract is a bargain, and when it fails to secure The Dis- 
for labour its competitive share of the product the cause must ^^ wage-^^ 
be sought in the unequal bargaining ability of workmen and earners as 
their employers. The principal disadvantages under which *'*g^^°^''=' 
workmen are placed are: First, that their labour resembles a 
perishable commodity in that it must be sold each day if they 
are not to incur loss. This circumstance forces them at times 
to accept wages that are below their normal earning capacity, 
but less often than many writers represent. The typical work- 
man, it should be remembered, is not the unemployed seeker 
after a job, whose unfortunate plight is so often pictured, but 
the man already employed, who is looking for a somewhat 
better position. Unemployment often forces workmen to make 
bad bargains, but even bad bargains may suffice to enable them 
to make better terms with their next employers. Only when 
unemployment continues so long as to break the spirit and 

385 



386 



The Labour Movement 



Competi- 
tion be- 
tween Em- 
I^loyers an 
Active 
Force 



Nature of 
the Labour 
Movement 



lessen the efficiency of a workman is it likely to cause a perma- 
nent lowering of his earning capacity. A second disadvantage 
results from the superior knowledge which employers usually 
have of the conditions that influence the wages contract. More 
intelligent as a rule, and able from their position to take a 
broader survey of the labour market, employers can often per- 
suade workmen to accept terms much worse than free, all-sided 
competition would secure for them. A third disadvantage 
results from the actual or tacit understandings which often. 
restrain employers from competing freely for employees by 
advancing wages. There is a strong reluctance on the part of 
employers to " spoil the labour market," and even when they 
are not com.bined in employers' associations, as often happens, 
this serves to make them conservative in reference to wages. 

The tendency of the above disadvantages is to render work- 
men inferior to employers as bargainers and to cause them to 
accept less than their fair share of the products they help to 
produce. This, it must be clearly understood, is only a tend- 
ency. Any disparity between current rates of wages and the 
value of the product which labour is able to produce affords an 
inducement to employers to secure more hands. Ordinarily this 
motive is strong enough to overcome the reluctance which em- 
ployers feel to bidding up wages, and ordinarily competition 
between them is sufficiently active to maintain wages even when 
the ignorance and inertia of workmen might lead them to accept 
less than market conditions call for. Only in cases in which the 
isolated workman, who is temporarily out of employment, bar- 
gains with the unscrupulous employer is full advantage likely 
to be taken of the former's weakness. As a protection against 
this situation workmen have devised and perfected labour asso- 
ciations or " trade unions," which not only put them on an 
equality with employers in making wage contracts, but even in 
some instances turn the scales in their favour and enable them 
to secure wages above normal competitive rates. 

§ 220. The labour movement is the term applied to the spon- 
taneous efforts of wage-earners to better their condition 
through labour organisations. Starting in its modern form in 
England at the time of the industrial revolution, it has spread 
to every country which has introduced the factory system and 



Objects of Labour Unions 387 

advanced with increasing momentum until it is one of the most 
significant features of the present industrial order. 

The purpose of labour organisations, or trade unions, is, in Objects of 
general terms, to advance the interests of the workmen who ^^V""'^ 
form them. To accomplish this they choose officers (usually a 
president, vice-president, secretary, treasurer, and members of 
a standing council or executive committee), accumulate funds, 
administer mutual insurance or benefit features, bargain with 
employers in reference to wages, hours, and other conditions 
of employment, organise and carry through strikes and boy- 
cotts, collect and disseminate information in reference to labour 
conditions, and agitate for legislation designed to promote the 
interests of labour. Starting with local organisations, the labour 
movement has now progressed in Great Britain and the United 
States to a point where it includes unions of unions of various 
kinds and designed to serve various purposes. In all well- 
organised trades the local branches are federated or " amalga- 
mated " into national organisations. In cities, local unions are 
usually organised further into " trade councils," or " united 
labour leagues," which look after the general interests of organ- 
ised labour within the locality. Related trades, as, for example, 
the building trades, are frequently federated also in each lo- 
cality into organisations like the United Building Trades, 
which are designed to assist individual unions to accomplish 
their objects when these are not deemed at variance with the 
interests of the whole body. Finally, in the United States, a 
large proportion of the organisations, both local and national, 
are members of the American Federation of Labour,* which 
stands for the general interests of organised labour. 

Exact statistics of the membership of American labour organ- The Mem- 
isations are not available, but it is certainly within the truth to ^^''ship of 
say that over 15 per cent, of the 10,000,000 odd men returned Unions 
by the census of 1900 as employed in trade, transportation, and 
manufacturing and mechanical pursuits were members of 
unions. Of these nearly 1,000,000 were associated with the 
American Federation of Labour. The membership of British 

*On June i, 1903, there \Vere affiliated with the American Federa- 
tion of Labour, 108 international unions, 28 State branches, 555 central 
bodies, and 1988 local trade and federal labour unions. 



388 The Labour Movement 

trade unions is considerably larger, being returned as 1,905,000 
on December 31, 1900. This is due partly to the fact that 
labour is there more fully organised and partly to the greater 
preponderance of wage-earners in the population. 
Of British The British Board of Trade publishes each year returns indi- 
cating the condition of the 100 principal unions in the country, 
which throw interesting light on different phases of the labour 
movement. In the year 1900 these unions had a membership of 
1,150,000 odd and an income aggregating nearly £2,000,000. 
Of this latter they spent less than £1,500,000 and they closed 
the year with a surplus averaging £37,670 for each organisa- 
tion. The principal items of expenditure for the year were 
working expenses, 25 per cent, of total ; unemployed benefits, 
18 per cent.; dispute or strike benefits, 10 per cent.; sick and 
accident benefits, 22 per cent. ; superannuation benefits, 13 per 
cent. ; and miscellaneous benefits and grants, 12 per cent. Sim- 
ilar statistics for American unions would undoubtedly indicate 
smaller proportionate expenditures on benefit features, except 
strike benefits, and larger working expenses. American unions 
are also less well supplied with surplus funds than those of 
Great Britain. 
Importance As a preparation for discussing some of the problems that 
Qaesdons have arisen in connection with the labour movement, it will be 
well to review briefly the development of the law in reference 
to labour organisations in Great Britain and the United States. 
The intimate relation between the legal systems of the two 
countries makes an understanding of the English law on this 
subject indispensable to American students of the labour prob- 
lem. 
The §221. Until 1824, combinations of workmen designed to 

nient of' raise wages or shorten hours were not only condemned as con- 
Trade spiracles under the common law of Great Britain, but were 
in the " prohibited by statutes, the last and most general of which were 
United passed in 1799-1800. During the first quarter of the last cen- 
" tury, Parliament was brought to see that this prohibition was 
both tmfair and unenforceable, and repeal followed in 1824 and 
1825. In the opinion of the courts, however, this did not alter 
the common-law rule against conspiracies, and in consequence 
labour organisations continued to be of doubtful legality m 



English Law of Conspiracy 389 

Great Britain until expressly permitted by the Trade Union 
Acts of 1871 and 1876, and the Conspiracy and Protection of 
Property Act of 1875. The worst phase of the situation which 
intervened during the fifty years prior to 1875 was that there 
was no clear consensus of opinion as to what was and what was 
not conspiracy under the common law. Even when not pro- 
ceeded against directly, labour unions found, when they wished 
themselves to proceed against defaulting officials, that they 
enjoyed no legal status, and hence could not recover damages, 
however clear the evidence. 

The acts referred to not only sanctioned labour organisations Growth 
fcy declaring that in future no action in connection with a trade 
dispute which was not criminal if committed by an individual 
should be indictable as a conspiracy because committed by a 
number of individuals, but also provided for their registration 
and for the protection of their funds. In consequence of this 
encouragement the labour movement has made remarkable 
progress in Great Britain since 1875, and labour organisations 
are now a dominant influence in determining wages and condi- 
tions of employment in many branches of industry. 

§ 222. The same acts which legalised trade unions amended English 

the criminal law so as to remove all uncertainty as to the lengths J^^^^ ^^ 

... , ., .,._.. °. Conspiracy 

to which workmen might go in their efiorts to improve their 

condition. Thus it was provided (Act of 1875) that malicious 
breach of contract of service on the part of an employee of a 
municipal gas or water company, calculated to cut off all the 
supply of either of these necessary commodities, should be a 
criminal offence punishable with a fine or imprisonment 
Another clause declared " intimidation," " persistent follow- 
ing," " hiding tools " or other property, " watching or beset- 
ting " a house or work-place, or following in company with 
others " in a disorderly manner " with a view to inducing a 
person to do something against his will, to be crimes if com- 
mitted by individuals, and consequently conspiracies if com- 
mitted by a number of individuals acting in concert. Although 
there has been some diversity of opinion as to the meanings 
properly attaching to thc^e different phrases, judicial inter- 
pretation has now established pretty clearly the conduct that 
is permissible in Great Britain during a labour dispute. 



390 



The Labour Movement 



Labour 
Unions 
Liable for 
Damages 



The 

Law in 
Reference 
to Labour 
Unions in 
the United 
States 



For some time after the Trade Union Acts were passed it 
was assumed that labour organisations, while perfectly legal 
and able (under these acts) to sue their own officers, were with- 
out corporate responsibility and consequently not themselves 
liable to suit or punishment. This view has been dispelled by 
recent decisions of English courts, of which the most impor- 
tant was rendered by the House of Lords, the court of last 
appeal under the English system, in the Taff Vale case in July, 
1901. The substance of this ruling was that a labour organisa- 
tion, although not a corporation, is nevertheless a legal entit)*-, 
and that, as such, it is responsible for its own acts and the acts 
of its authorised agents and may therefore be sued and mulcted' 
in damages for injuries inflicted by itself or its agents, or for 
failure to fulfil its legally binding contracts. There is great dif- 
ference of opinion as to the effect this decision is likely to have 
on the progress of the labour movement. That it will compel 
labour organisations to proceed with greater circumspection 
than in the past is evident. So far as this results in greater 
regard for law and order it can only be advantageous. Its 
possible bad effects are found in the danger that it may involve 
labour organisations in ceaseless and, in the end, useless litiga- 
tion calculated not only to deplete their treasuries,* but to 
divert them from their proper objects. 

§ 223. The development of labour organisations in the United 
States has not been checked to any appreciable extent by legal 
restrictions. Strikes for the purpose of advancing wages or 
shortening hours have rarely been held to be illegal, and in. 
many of the States they are expressly authorised by statute. 
In fact, the attitude of State legislatures has been uniformly 
favourable to labour organisations, some of them even going to 
the length of prohibiting employers from discharging employees 
on the ground that they are members of such bodies. Strikes 
for other purposes, as, for example, to compel an employer to 
reinstate a discharged employee or to discharge an employee 
who is not a member of the union, have sometimes been con- 
demned as conspiracies. The opposition of the courts in such 
cases has been based not on hostility to labour organisations as 

*The final award against the union in the Taff Vale case amounted 

to ;^23,000, 



Influence of English Precedents 391 

such, but on a desire to uphold the rights of persons who are 
not members of them. Thus the Court of Appeals of New 
York State, in branding as a conspiracy the effort of a union to 
secure the discharge of a non-union man, used the following 
language : " Public policy and the interests of society favour 
the utmost freedom in the citizen to pursue his lawful trade or 
calling, and if the purpose of an organisation or combination of 
workingmen be to hamper or restrict that freedom, and through 
contracts or arrangements with employers to coerce other work- 
ingmen to become members of the organisation and to come 
under its rules and conditions, under the penalty of loss of 
their position and of deprivation of employment, then that pur- 
pose seems clearly unlawful and miilitates against the spirit of 
our Government and the nature of its institutions."* This 
decision is cited because a few years laterf the same court, look- 
ing at the same question more from the point of view of labour 
tmions, decided that a strike for a similar purpose was lawful, 
on the ground that the object sought was not the injury of the 
non-union employee, but the preservation of the union. So long 
as there seemed to be no malice in the action, and violence and 
intimidation were not resorted to, it was held that the incidental 
injury to the non-unionist could not render it a conspiracy. This 
reversal of opinion illustrates fairly well the difficulties which 
American courts encounter in their efforts to apply the common 
law of conspiracy to labour cases and explains why they arrive 
at such diverse conclusions as are shov^m by the authoritative 
decisions of the courts of the different States. It would be a 
great gain if the whole question of the nature of conspiracy in 
connection with trade disputes could be settled by statute in the 
United States as it was in Great Britain by the Act of 1875. 

Until quite recently the view that unincorporated labour The 
organisations were not liable to be sued for damages was held ^f Eif^i^sh 
in the United States as in Great Britain, but the English deci- Precedents 
sions cited have already been quoted with approval by American 
courts, and several cases are now on record in which labour 
organisations as such have been sued and verdicts against them 

* In Outran vs. Gallen, 152 N. Y. 33 (1897). 

fin National Protective Association vs. Cummings, 170 N. Y. 315 

<1902). 



The 
Benefit 
Features 
of Labour 
Unions 



392 The Labour Movement 

awarded. There seems every reason to believe that labotl^ 
organisations in the United States will in future be held respon- 
sible for their own acts and the acts of their authorised agents, 
even though they be unincorporated, except in States in which 
they are expressly relieved from responsibility by statute. In the 
less highly developed condition of American labour unions and 
of American judicial opinion on the labour problem, this novel 
doctrine may serve to retard the progress of the labour move- 
ment even more than it is likely to in Great Britain. In order 
that it may not prove an unfair weapon in the hands of employ- 
ers, the acts which a union or its agents may commit with 
impunity during the progress of a strike should be clearly set 
forth in statute law. 

§ 224. As indicated in the statistics given in Section 220, ex- 
penditures for benefits constitute a chief item in the budgets of 
trade unions. This may well excite surprise on the part of per- 
sons who look upon these organisations as little more than 
strike clubs, and requires some explanation. The benefits paid, 
which are, as noted, for unemployment, accident, illness, super- 
annuation or death, are defended by unionists less on the 
ground that a union is suited to act as an insurance company 
than that it may assume this function with little added expense, 
and that by this means it can add largely to its resources for use 
in time of emergency. Mutual insurance is not, in other words.; 
an object of trade unions so much as a means to their real 
object, the improvement of the conditions of employment for 
their members. The ready objection to the use of benefit 
features as a lure to attract members and to add to the size of 
the strike fund is that it may lead a union to default on the 
benefit payments it has promised and thus in the end do it and 
its members more harm than good. Unionists maintain that 
this rarely happens, since, after a strike, members are usually 
willing to submit to higher dues until the surplus is restored. 
Another objection urged by unionists themselves is that benefit 
features are apt to make union officials too conservative and to 
divert their attention from the primary purpose of their organi- 
sations. 

A decision as to the wisdom of including insurance, 
other than out-of-work insurance, among the functions of 



Collective Bargaining 393 

trade unions must depend upon the circumstances of each 
particular case. Where no better mutual insurance asso- 
ciation is available such an extension seems not onl}^ justi- 
fied, but called for. On the other hand, the business of insur- 
ance is not one for which a trade union is particularly well 
adapted, and there is little question that the needed service can 
be performed more cheaply and safely by an association having 
this for its sole object. Such associations, called " friendly 
societies," are already numerous in Great Britain and are not 
unknown in the United States. As time goes on there seems 
reason to believe that they will gradually relieve the unions 
of this particular function. 

§ 225. Intelligent unionists rely chiefly upon collective, as Collective 
distinguished from individual, bargaining to secure the ad- l^^^g^i^^^g 
vances in wages and the shortening of hours for which they are 
always striving. Recognising the weakness in bargaining 
power of the isolated workman, they advocate trade unions as 
a means of restraining reckless competition for employment and 
of securing for all concerned standard rates of wages which 
shall equal approximately what each given grade of labour is 
worth to employers. Where em.ployers accept the plan, wage 
scales are agreed upon by conference between their representa- 
tives and representatives of the union, to remain in force usually 
for a year, and the principal task of union officials during the 
intervals between bargaining periods is to maintain the integ- 
rity of their unions, add to their membership if possible, and 
see that agreements in reference to wages and hours are lived 
up to. In the United States this stage of development has been 
reached in only a few trades. In most of them employers still 
insist upon the older method of fixing wages and the unions . 
are forced to carry on a struggle for their very existence. 

The objections which employers make to collective bargain- Employers' 
ing are various. Many of them insist that they must be permit- Objections 
ted to manage their businesses in their ov/n way and that, while ive 
they are always ready to treat with their own employees, they Bargaining 
will have nothing to do with '' walking delegates " or other 
trade-union officials who try to run their businesses for them. 
The trade-union reply to this contention is that wages and 
hours are as much the business of the employee as of the em- 



394 The Labour Movement 

ployer, and if the former prefer to leave their determination to 
trained representatives they have as good a right to do so as 
have the latter to hire special agents to treat with the men they 
employ. Other objections are that the demands of trade-union 
officials become more and more unreasonable with ever}^ conces- 
sion that is made to them, and that even after a collective bar- 
gain has been struck the employer has no guarantee that it will 
be adhered to by his employees, who may repudiate their own 
representatives. Unionists reply that while there are all kinds 
of officials among trade unions, as among other associations, the 
acceptance by employers of the principle of collective bargain- 
ing is a sure way of bringing to the front labour leaders of a 
conciliatory and pacific disposition. They point to the undoubted 
fact that in those trades where collective bargaining has been 
longest practised there is the least dissatisfaction with it on the 
part of employers. The likelihood that collective bargains, 
formally entered into, will not be adhered to by employees is, in 
the opinion of the unionists, too slight to deserve serious consid- 
eration. Only in cases in which the system is backed by a weak 
union, or so recently adopted as not to be understood by the 
workmen concerned, is this a real danger. Finally, employers 
object to the standard wage on the ground that it is a device 
for securing a given rate of pay irrespective of the amount or 
quality of the work done. They complain that as soon as a 
standard wage is agreed upon employees begin to devise means 
of scamping their work, partly to spare themselves effort and 
partly in the belief that by doing less work themselves they will 
provide employment for others, who must, without it, either be 
idle or work for less than the standard wages. This is, doubt- 
less, the most serious objection to the standard wage, but trade 
unionists have much to urge on the other side. They insist, 
first, that the objection can apply only to time wages and that, 
as a matter of fact, piece wages are as frequently the object of 
collective bargaining as the former ; second, that the standard 
wage is only a minimum wage and that there is nothing to 
prevent the employer from declining to hire men whose work 
is not worth so much to him, nor from paying higher wages to 
men whose work is worth more; finally, that under the com- 
petitive wage system employers tend to drive their men so hard 



Conclusion 395 

that they become prematurely old, and that the latter are quite 
justified in using the power that association gives them to mod- 
erate somewhat the intensity of their daily efforts. 

It is very difificult to strike a balance between these opposing Conclasioa 
arguments. There is, undoubtedly, a widespread notion among 
workmen that there is a certain amount of work to be done in 
the world and that unemployment is due to the fact that this 
vYork will not go around so long as those employed continue to 
labour with the same intensity. This notion seems to have more 
to do with the various devices that are resorted to to curtail the 
output from each man's effort than laziness. As a general 
proposition, it is hardly necessary at this stage to insist that the 
view that men may make work for others by doing less them- 
selves is entirely fallacious. The amount of work that is to be 
done depends upon the demand there is for goods of different 
kinds, and this demand comes itself from goods. If in every 
department of industry the productiveness of labour should be 
reduced by lo per cent, the demand for labour would necessa- 
rily decrease in the same proportion. The same conclusion may 
be inferred from the theory of wages that has been explained. 
Under freely competitive conditions they are the equivalent of '. 

what labour produces, and if workmen deliberately reduce their 
productiveness their wages must be reduced proportionately. 
There is no fund other than what workmen produce out of 
which wages can or will for any length of time be paid. The 
make-work argument for curtailing the output of each man's 
toil is thus without foundation, and the policy can only react 
to the disadvantage of the whole wage-earning class. On the 
other hand, there is undoubted truth in the assertion that em- 
ployers often desire workmen to labour with an intensity that 
wears them out in a few years, and that their best interests and 
the interests of society demand that they should work with 
more moderation. When this is the real purpose of trade 
unions in curtailing the output of each man's labour, the policy 
is justified, even though it must involve in the long run a pro- 
portional lessening of wages. Smaller daily earnings spread 
out over a greater number of active and efficient working years 
are better from every point of view than higher wages secured 
at the cost of health and vitality. 



396 The Labour Movement 

strikes and § 226. When employers decline to enter into collective bar- 
gains, or when the representatives of a trade union cannot come 
to terms with representatives of an employer, a strike or lockout 
is apt to be the result. The former is a general cessation of 
work on the initiative of the workmen ; the latter a similar 
stoppage brought about by employers. Strikes and lockouts 
seem at first thought the logical accompaniments of collective 
bargaining. When a single workman cannot secure the wages 
or hours he thinks he ought to have he declines to accept em- 
ployment. Similarly, an employer refuses to employ on terms 
that are not agreeable to him. Strikes and lockouts appear to 
be similar phenomena transferred to the larger stage of col- 
lective bargaining. There is, however, a vital difference in the 
two cases. When a workman declines employment or an em- 
ployer refuses to employ, it is usually with the expectation of 
making better terms with someone else. This alternative is not 
usually presented in the case of strikes or lockouts. The cessa- 
tions of work which they cause is complete until one side or the 
other gives in, when work is resumed by substantially the same 
men under the same employer. Strikes and lockouts thus mean, 
while they last, idleness and loss of earnings, with all of their 
demoralising consequences, for workmen ; idle capital, depre- 
ciation of plant and loss of business for employers, and cur- 
tailed production of goods and resulting loss in want satisfac- 
tion for the community. Even if they are not accompanied, as 
is so frequently the case, by acts of violence and lawlessness, 
they are the cause of loss and waste on a scale that makes them 
a serious obstacle to prosperity. According to a report of the 
Department of Labour, losses from strikes and lockouts in the 
United States from January i, 1881, to June 30, 1894, 
amounted to $285,000,000. The number of establishments 
affected was 75,000, so the average loss amounted to $3790. 
An even more significant indication of the costliness of strikes 
is afforded by the Report of the Commission on the Anthracite 
Coal Strike. This estimates that the strike, which lasted 
from May until October, 1902, involved a loss in receipts 
to the coal-mining companies of $46,100,000, of which some 
$25,000,000 would have been paid out in wages had work been 
continued, and a loss in freights to the coal-carrying railroads 



Use of the Boycott 397 

of $28,000,000. The inconvenience and actual suffering to 
which the public was put by the resulting shortage in coal can- 
not be measured in money, but it was certainly as serious as 
the other losses combined. 

The anthracite-coal strike illustrated also the evils of vio- Use of the 
lence and lawlessness which frequently accompany strikes. In ^'^X^^'p , 
the language of the Commission referred to : '' Its history Strike 
[was] stained with a record of riot and bloodshed, culminating- 
in three murders, unprovoked save by the fact that two of the 
victims were asserting their right to work, and another, as an 
officer of the law, was performing his duty, in attempting to 
preserve the peace. Men who chose to be employed, or who 
remained at work, were assailed and threatened, and they and 
their families terrorised and intimidated. In several instances 
the houses of such workmen were dynamited, or otherwise 
assaulted, and the lives of unoffending women and children 
put in jeopardy." Nor were violence and intimidation the only 
means resorted to by the strikers and those who sympathised 
with them to prevent others from remaining at work. Free 
use was made of the " boycott," which the Commission defines 
as " a form of coercion by which a combination of many per- 
sons seek to work their will upon a single person, or upon a 
few persons, by compelling others to abstain from social or 
beneficial business intercourse with such person or persons." 
Among the many examples of uses of the boycott brought out 
in hearings before the Commission, the following are cited in 
its Report : "A young schoolmistress of intelligence, character, 
and attainments was so boycotted, and her dismissal from em- 
ployment compelled for no other reason than that a brother, 
not living in her immediate family, chose to work contrary to 
the wishes and will of the striking miners. A lad, about fifteen 
years old, employed in a drug store, was discharged, owing to 
threats made to his employer by a delegation of the strikers, on 
behalf of their organisation, for the reason that his father had 
chosen to return to work before the strike was ended. In sev- 
eral instances tradesmen were threatened with a boycott — that 
is, that all connected with the strikers would withhold from 
them their custom, and persuade others to do so, if they con- 
tinued to furnish the necessaries of life to the families of cer- 



;98 



The Labour Movement 



Difficulty 
of Enforc- 
ing Law 
during 

Strikes 



Plans for 
Avoiding 
Strikes 



Trade 
Agree- 
ments 



tain workmen, who had come under the ban of the displeasure 
of the striking organisations." 

The violence, intimidation, and boycotting, which accom- 
panied the anthracite strike, differed only in degree from what 
is to be expected in connection with every serious labour dis- 
turbance and constitute a strong argument against the strikes 
and lockouts which excite them. They are especially apt to ac- 
company strikes, for, as the Anthracite Strike Commission 
declared, " there can be no doubt that without threats, intimi- 
dation, and violence toward those who would otherwise be will- 
ing to remain at work, or take the places of those who had 
ceased to work, the coercion of employers, which a strike al- 
ways contemplates, would be less potent in compelling ac- 
quiescence in its demands." Such acts are, of course, illegal, 
but in self-governing communities it becomes very difficult to 
enforce the law when the sympathies of the majority are on the 
side of those who disregard it. Over and over again in 
the United States it has proved necessary to call out the militia 
to prevent riot and bloodshed in connection with strikes which 
have passed beyond the control of the civil authorities. For 
these reasons, as well as on account of the loss and incon- 
venience which strikes and lockouts entail, several plans have 
been proposed for the peaceful settlement of disagreements in 
reference to wages, hours, and other conditions of employment. 

§ 227. Among the plans for rendering strikes and lockouts 
unnecessary, three different types may be distinguished: (i) 
those which rely on agreements between employers and em- 
ployees to submit differences to boards of arbitration created 
by themselves; (2) those which rely upon the submission of 
disputes to State boards of conciliation and arbitration and the 
voluntary acceptance of the awards of the latter; (3) those 
which rely upon compulsory arbitration through State boards 
or courts. 

' Trade agreements providing for arbitration when collective 
bargaining fails of its purpose are already common in Great 
Britain and to a less extent in the United States. After a 
protracted strike or lockout both employers and employees are 
likely to recognise the desirability of some arrangement that 
will preclude similar disturbances in the future and out of this 



Conciliation and Arbitration 399 

feeling some plan for arbitrating differences is very apt to 
develop.* Such plans are highly beneficial so long as they ac- 
complish their purpose, but experience seems to indicate that 
they can only deal with minor differences between em- 
ployers and employees. When important issues arise on 
which the views of the two are diametrically opposed, the com- 
promise which is suggested by a board of arbitration may be 
acceptable to neither. In such cases both may prefer to fight it 
out in the old way. If the award of the board is less in the 
nature of a compromise than a yielding of the whole point to 
one side or the other, then acceptance by the aggrieved party 
is sure to be grudging, and if the latter feels strong enough to 
undertake a struggle the whole machinery for collective bar- 
gaining may be repudiated. The situation is similar to that 
between great nations which have agreed to refer their differ- 
ences to arbitration in preference to going to war about thern^ 
Such agreements will be adhered to so long as no serious dif- 
ferences arise, but, in the absence of any outside authority to 
enforce them, they are very likely to be broken when one or the 
other thinks it could gain more by fighting. 

Experience with the failure of trade agreements to super- State 
sede strikes and lockouts has led most countries to provide ofConcilia- 
public boards of conciliation and arbitration. These may be tion and 
purely voluntary bodies dependent upon the invitation of one 
or both of the parties to the trade dispute for power to take 
any part in it, or independent to the extent that they may 
investigate the causes of a dispute and decide as to its merits, 
although unable to compel the parties concerned to accept the 
decision or refrain from fighting it out in their own way if 
they prefer. Tlie first type of board was that first tried in the 
United States, and it was soon made clear that in a great ma- 
jority of cases neither party to an industrial dispute cares to 
submit it to arbitration before it has passed beyond the point 
where a peaceful settlement can be effected. This conviction has 

* A description of the more important trade agreements in opera- 
tion in the United States, which have arbitration as one of their 
features, is given in the Reports of Proceedings of the National Con- 
ference on Industrial Conciliation and the Industrial Conference of 
the National Civic Federation, 1901 and 1902. 



400 



The Labour Movement 



Reasons 
for Govern- 
ment Inter- 
ference 



led to the creation in Great Britain and in several of the States 
of the United States of boards of conciliation and arbitration 
which have power to investigate the causes of industrial 
disputes on their own initiative. There seems reason to think 
that much more might be done along this line in the United 
States. In a great majority of cases the outcome of a labour 
dispute is determined by the view which the public takes of the 
points at issue. This is because neither side is strong enough 
to hold out against the other plus the public. The great diffi- 
culty is that without some means of self-education the public 
can become acquainted with the grounds for a labour dispute 
only after it has gone too far for peaceful settlement. A State 
board of conciliation and arbitration with power to intervene 
on the instant that it learns of a labour dispute may at times 
succeed in effecting a settlement by simply bringing the parties 
together and suggesting possible bases of agreement, at the 
same time that it removes misunderstandings and assuages 
wounded feelings. Failing in this it may, by making public its 
findings in the case and indicating clearly the settlement which 
appears to it fair, bring such pressure to bear upon the less con- 
ciliatory disputant that a compromise will seem better than a 
fight and a prolonged strike or lockout will be avoided. Thus, 
although without power to enforce its award, a State board of 
conciliation and arbitration may often prevent strikes and lock- 
outs. 

The chief justification of government interference to settle 
a labour dispute is that the public interest is always more or 
less involved and that for the sake of the public no effort should 
be spared to preserve industrial peace. It was on this ground 
that the President of the United States intervened in the an- 
thracite-coal strike already referred to. In its Report the Com- 
mission, which he created, declared that it had been impressed 
by " the apparent lack of a sense of responsibility to the public 
at large, manifested by both operators and mine workers, in al- 
lowing the controversy between them to go to such an extent as 
to entail upon millions of their fellow-citizens the cruel suffer- 
ing of a fuel famine." In its opinion, it continued, " the ques- 
tions involved in [that] controversy were not of such impor- 
tance as to justify forcing upon the public consequences so 



Compulsory Arbitration 401 

fraught with danger to the peace and good order as well as to 
the well-being and comfort of societ}^ If neither party could 
have made concessions to avoid a result so serious, an arbitra- 
tion would have prevented the extremity which was reached." 
To secure such a result in future the Commission recommended 
that the President and the Governors of the various States be 
given power to appoint " commissions of compulsory investiga- 
tion " whenever industrial disputes appear to them of sufficient 
importance to justify such a course and that such commissions 
be clothed with ample powers to enable them to collect all requi- 
site information and decide intelligently as to the merits of the 
controversies. The utility of such commissions of compulsory 
investigation cannot be doubted, and it is to be hoped that the 
recommendation may be followed by Congress and the State 
legislatures. 

§ 228. In the United States, notwithstanding the disregard Compulsory 
of the public interest so characteristic of both employers and ■^'^^^t^^.ttoH 
employees during the progress of industrial disputes, there is 
as yet little demand for any more radical remedy than com- 
pulsory investigation. Nevertheless the experiments that are 
being tried in Australasia with " compulsory arbitration " de- 
serve to be watched with attention. The same forces that have 
led all countries to put a stop to civil strife and insist that citi- 
zens who cannot agree shall bring their troubles into court 
rather than fight over them, may in time cause the adoption of 
a similar policy in reference to industrial strife. If, as many 
competent witnesses maintain, strikes and lockouts can be en- 
tirely superseded by compulsory arbitration without detriment 
either to employers, employees, or the public, the introduc- 
tion of the latter in all progressive countries is likely to be a 
question only of time and occasion. 

The pioneer in the field of compulsory arbitration was New New 
Zealand, whose first law making strikes and lockouts misde- l^steof' ^ 
meanours was passed in 1894. By this Act the country was 
divided into seven districts, each of which was provided with 
a board of conciliation, which was to take the initiative in at- 
tempting to adjust differences between employers and em- 
ployees and in case of failure to refer the dispute with recom- 
mendations to the Court of Arbitration also created. The 



402 The Labour Movement 

boards of conciliation failed so often to settle disputes referred 
to them that an amendment was added, in 1901, permitting 
direct reference to the Court of Arbitration, The latter con- 
sists of three judges, one a judge of the Supreme Court, and 
transacts business in very much the same way as any other 
tribunal. It has power to subpoena witnesses, examine books,, 
and, in fact, to sift the cases brought before it to the very 
bottom. The decisions or awards at which it arrives remain in 
force for three years unless superseded by subsequent decisions, 
and failure to comply with them is a serious offence. As a. 
result of its activity nearly every trade in the Colon}' in which 
industrial disputes may arise is now carried on under stipula- 
tions as regards wages, hours, and other conditions of employ- 
ment laid down in its decisions. The system has thus not only 
put a stop to strikes and lockouts, but has made the relations 
between employers and employees subject to judicial determi- 
nation in somewhat the same wa}'' that they were in England 
in the sixteenth and seventeenth centuries. 
Ti^e The seeming success of New Zealand's experiment induced 

New South New South Wales to send a special commissioner to that coun- 
Wales try in 1901 to study its operation. His report was so favour- 

able that New South Wales also adopted the system of com- 
pulsory arbitration, as a substitute for strikes and lockouts, in 
1902. Western Australia had adopted it a year earlier, so it 
is now in operation in three of the states of Australasia. The 
system of New South Wales differs from its model in that it 
provides no local boards of conciliation, but requires the refer- 
ence of all disputes to the Central Court of Arbitration. It 
also requires that the awards of the latter shall apply not merely 
to the disputants, but to the whole trade which they represent. 
Thus the result which has been achieved somewhat unexpect- 
edly in New Zealand, that is, a comprehensive labour code to 
govern the relations between employers and employees through- 
out the whole country, is deliberately aimed at in New South 
Wales, This code is subject of course to modification through 
the law-making power, but, with the labotir legislation con- 
sidered in the next chapter, it sets very definite limits to free 
competition and free contract as regulators of industrial rela- 
tions. Compulsory arbitration is still in the experimental stage 



Use of the Injunction 403 

and too novel to be judged either a failure or a success, but it 
certainly merits the consideration of all countries interested in 
the solution of the strike problem. 

§ 229. Experience with the violence and disorder which so Use of the 
frequently accompany strikes has led in the United States to Injunction 
the free use of the judicial process called " the injunction." tion with 
This was developed by English courts as a means of prevent- strikes 
ing irreparable or continuing injuries to property for which, in 
the nature of the case, if the injury were permitted to occur, 
no adequate damages could be secured. The peculiarity about 
the process is that when a court issues an injunction, violation 
of its order becomes in effect contempt of court and exposes the 
guilty person to such punishment as the court itself may de- 
cree. The ordinary protections accorded to criminals, such as 
trial by jury, the right to be represented by counsel, etc., are 
set aside, and the offended tribunal becomes itself prosecutor, 
judge, and jury all in one. The inevitable tendency of the sys- 
tem is to deprive trials in injunction cases of that judicial 
temper which should characterise the relation between a court 
and an accused person, no matter what his offence. 

The applicability of the injunction process to labour dis- Legal 
turbances is very clear. Workmen on strike are very apt to ^j^^^ 
commit acts of lawlessness which involve the destruction of 
property and the interruption of business. Moreoveir they are 
usually irresponsible persons in the sense that it would be im- 
possible by means of a civil suit for dam.ages to secure redress 
after the injury had been inflicted. On these grounds courts 
readily issue injunctions to restrain workmen from doing 
illegal acts which involve the destruction of property. Injunc- 
tions have even been issued ordering workmen not to strike, on 
the ground that strikes interrupt business and cause loss, but 
the best authority gives no countenance to such use. 

From being express orders to designated individuals to do or Extension 
to refrain from doing specified acts, injunctions have devel- injunctions 
oped in the United States into sweeping commands to an in- 
definite number of persons ordering them not only not to do 
certain things, but to keep the peace in general. In the famous 
Debs case, growing out of the Pullman strike in 1894, an in- 
junction was issued by a circuit court of the United States to 



4^4 



The Labour Movement 



Reasons for 
Opposing 
Resort to 
Injunctions 



The In- 
fluence of 
Labour 
Unions on 
Wages 



members of the American Railway Union and " all other per- 
sons whomsoever," enjoining them from in any way interfer- 
ing with the business of twenty-three great railway systems 
engaged in carrying the mails, and this notwithstanding the 
fact that interfering with the carrying of the mails is itself a 
crime ! 

Space will not permit a full discussion of the arguments for 
and against the use of the injunction as a means of preventing 
violence and disorder in connection with strikes. Perhaps the 
strongest argument against such use is that in the present state 
of public opinion on the subject it rarely attains the object 
aimed at. Employers have in fact been brought to the convic- 
tion that an appeal to the courts in connection with a strike is 
likely to do more harm than good. In the opinion of the writer 
the prejudice of peaceable and law-abiding workmen against 
the injunction is well founded. Most of the acts enjoined are 
themselves criminal and punishable by criminal process. For 
the courts to interfere in such cases to protect property is in 
reality to deprive criminals of the protection to which they are 
entitled in a country which justly prides itself on its free in- 
stitutions. That the purpose of the interference is not the 
punishment of crime does not alter this essential fact. Prec- 
edents for resort to the injunction are too well established to 
permit anything but a gradual abandonment of the practice, 
but it may be hoped that in its use courts will pay increasing 
regard to the practical effects of their procedure. If they 
would refrain from issuing injunctions to " all persons whom- 
soever," as in the Debs case, and confine punishment for con- 
tempt to imprisonment until the emergency which makes dis- 
regard of the injunction probable has passed, the worst abuses 
that have been charged to the practice would be avoided with- 
out any impairment of its efficiency as a means to the prompt 
suppression of disorder. 

§ 230. The theory of v/ages that has been explained in these 
pages is that under conditions of free, all-sided competition 
workmen will be able to secure wages corresponding closely to 
the additions their labour makes to the value of the product. 
We have now to inquire what effect the presence of trade 
unions has upon the operation of this law. Do they serve 



The Case of Open Unions 405 

merely to equalise conditions between employers and employees 
so that the competition between them is really freer because 
fairer, or do they introduce an elem.ent of monopoly on the side 
of labour which enables workmen to secure more than free 
competition would bring to them ? In the opinion of the writer 
their influence in all but exceptional cases is confined to the 
first effect. In most trades in the United States there are both 
union and non-union men seeking employment. The former 
are striving constantly to induce the latter to unite with them 
in the effort to secure better terms from the employers, but 
because of selfishness, short-sightedness, indifference, or some 
other reason, there are always some of the latter who refuse to 
do so. As a consequence of this situation there is a source of 
supply on which employers may draw for their labour in case 
of emergency, which the unions are unable to control. The 
competition for employment of this non-unionised labour sets 
a limit to the influence which the unions may have upon wages. 
The very best they can do for their members is to secure for 
them the full competitive rate. If they try to secure more em- 
ployers will refuse to employ all of them, defections to the 
ranks of the non-unionists will occur, and the competition for 
employment of the latter will break down the standard rate. 
On the other hand, if they follow their own interest intelligently 
they can secure not only for their own members, but for all the 
workmen in the trade, the full competitive rate of wages. 
Representative employers can afford to pay this and will do so 
if their ability in bargaining is matched on the other side. The 
services the unions perform in securing this result may be sum- 
marised under the following heads : ( i ) they are organised to 
resist unfair terms and to cause loss to the employer who at- 
tempts to cut wages below the fair competitive rate; (2) they 
keep workmen informed as to the rates that are actually paid 
and in this way protect them from making bad bargains 
through ignorance; (3) they inform themselves in regard to 
general market conditions and force employers to advance 
wages when conditions are favourable, more promptly than 
they would without such coercion. 

The above account of the influence of trade unions fails to Tlie Case 

of Open 
consider trades m which all or practically all workmen belong Unions 



4o6 



The Labour Movement 



to unions. Such trades are, as stated, rare in the United States 
and even in Great Britain, but that makes them no less inter- 
esting, since they represent the type whose realisation is the 
goal of trade unionists' efforts. The influence of the unions 
on wages in such trades depends upon their policy in reference 
to the admission of new members. This policy is determined 
in most factory employments by the ease with which the task 
to be performed can be mastered. When, as in the textile 
trades, no long apprenticeship is necessary, the unions must 
admit everyone to membership whom employers will hire, 
on pain of losing control over the industry. When a union is 
open in this way to all comers the rate of wages which it 
can secure for its members cannot exceed the competitive 
rate for workmen of the given grade of skill. If it did 
employers could not afford to hire all of the members of 
the union. The unemployed would become dissatisfied and 
either leave the unions or force them to lower the standard rate 
imtil the demand should absorb them as well as their more for- 
tunate fellows. In either event the standard rate would be 
brought to correspond closely to the competitive rate, as it was 
by the competition of non-unionists in the previous case. 

§231. There are some trades in which the unions control 
practically the entire labour force and in which conditions 
Monopolies permit the use of such control as a means to securing monopoly 
earnings. These are trades in which a long period of appren- 
ticeship is necessary to the mastery of the tasks to be performed 
or in which legal obstacles, such as the requirement of a cer- 
tificate of proficiency as a condition to engaging in the trade, 
prevent any sudden increase in the number of master-work- 
men. When a trade union becomes strong enough in a trade 
of this type to limit the number of apprentices, or to determine 
the period of apprenticeship or the severity of the examination 
necessary to entrance to the trade, it may exercise effective con- 
trol over the supply of competent workmen. By limiting such 
supply it may secure a virtual monopoly for its members and 
advance their wages to any point which the demand for their 
services permits. The management of such a monopoly calls 
of course for tact and skill because it has to contend with the 
opposition of other workmen, who would like to learn the trade 



Labour 
Unions 
Sometimes 



Laws Helpful to Unions 407 

and are prevented from doing so, with the opposition of em- 
ployers who object to paying such high wages, and with the 
opposition of the consuming pubhc which objects to paying 
high prices for the products of the labour monopoly. Never- 
theless such monopolies have existed and do exist, and the 
realisation of them is the deliberate purpose of many trade 
'unionists. 

In the United States there are both State and national laws State and 
that directly further the monopolistic ambitions of trade unions. Law^Hel 
The State of Pennsylvania has a law requiring men who vv^ish ful to 
to become master miners to work as helpers for a certain period "'^'^s 
and to pass then a State examination. New York State has 
similar law^s in reference to plumbers and horse-shoers. The 
purpose of such statutes is of course to insure a certain degree 
of proficiency on the part of workmen who perform these im- 
portant services, but that they assist trade unions in their efiforts 
to control the supply of labour in their trades is beyond ques- 
tion. A Federal law which operates in the same direction is 
that prohibiting the entrance into the country of workmen 
under contract of employment. It might appear on general 
principles that the immigrant whose reputation at home was 
such that he could secure a contract of employment from an 
employer in this country would be a better citizen than the im- 
migrant who was attracted only by the vague hope of bettering 
his condition, but this view disregards the special interest of 
those with whom the newcomer would compete for employ- 
ment. From their point of view, as voiced by the trade unions, 
the contract labourer is a much less desirable acquisition than 
the mere immigrant. The former enters the country as a non- 
unionist, or " scab," at the very outset and the possibility of 
hiring him may enable an employer to be quite independent of 
a labour organisation which, but for this outside competition, 
could control the labour supply in the particular trade. The 
law which prevents such resort to the foreign labour market to 
break a strike has assisted trade unions in the United States to 
win more than one victory. So far as it enables them to main- 
tain higher wages for American workmen in all branches of 
industry — and this is believed to be its principal effect — 
its influence is beneficial, but when it serves to confirm a ' •■ 



4o8 



The Labour Movement 



Monopolis- 
tic Unions 
to be Con- 
demned 
Like other 
Monopolies 



Educa- 
tional 
Work of 
Labour 
Unions 



close union's monopoly of the labour supply in its particular 
trade and to enable those benefited to secure monopoly earn- 
ings, the result is obtained, as in the case of other monopoly 
incomes, at the expense of the whole community. It injures 
consumers since it compels them to pay higher prices for the 
goods whose production is controlled by the labour monopoly, 
and it injures other workmen since it limits the field of em.ploy- 
ment open to them and forces wages in other trades down to 
lower levels than would result from free, all-sided competition. 

In the United States few trade unions have succeeded in 
establishing labour monopolies, but in the building trades, in 
the glass industry, and in a few other employments such 
monopolies are complained of. That they are as much 
open to public condemnation as any other species of mo- 
nopoly not controlled in the general interest seems to the 
author too clear for argument. Unions which make such 
control of the labour supply in their trades the object of 
their efforts and seek to realise it by limiting the number 
of apprentices, charging exorbitant initiation fees, refusing 
to work with non-unionists, and using every means from 
strikes to intimidation and violence to prevent the latter 
from gaining a foothold in the trade, must expect to meet 
the same criticism that is levelled against the trusts and other 
would-be monopolies. All of these policies except intimi- 
dation and violence are defensible as means to maintaining 
standards of workmanship and standards of pay proportionate 
to earnings in other trades. None of them are defensible as 
means of preventing ambitious and competent men from mas- 
tering the trades concerned and deriving the same benefits 
from their energy and enterprise as do those already in the 
trade. Trade unionists will do well themselves to note the 
distinction between labour organisations aiming to promote 
the interests of labour generally and labour monopolies aiming 
to promote the interests only of the fortunate fevv^ who happen 
to be members at the expense of the many who are not. 

§ 232. In addition to the purposes that have been considered 
trade unions have other objects that deserve commendation. 
Perhaps the most important aspect of their work is the educa- 
tional. By bringing their members together to discuss ques- 



Labour Unions and the Public 409 

tions of common interest they do a great deal to make them 
more intelligent and broader in their insight into economic and 
political problems. The experience which workmen get in 
managing their unions helps them to appreciate the importance 
of organisation as a condition to success and to perceive the 
value of the industrial service which their employers render. 
In the same way the accumulation and administration of the 
funds which they collect gives them clearer notions in refer- 
ence to the origin and service of capital. From these facts it 
results that leading trade unionists are apt to be men of unusual 
ability, whose views on the labour question are conservative 
rather than radical and who, in the absence of personal preju- 
dice, command the respect and esteem of employers almost as 
much as of their fellow workmen. 

The most important book dealing with trade unions in Eng- Schools of 
land that has yet appeared bears the significant title, " Indus- Citizenship 
trial Democracy." This makes prominent another service that 
trade unions render. As miniature democracies they reproduce 
on a smaller scale the self-governing states on whose success 
the future so largely depends. Their members learn in them 
how to give way when they cannot persuade, how to sacrifice 
smaller for greater ends, and in general how to defer grace- 
fully to the opinions and prejudices of others — qualities which 
are essential to the successful working of democratic institu- 
tions. The authors of the work referred to, Mr. and Mrs. 
Webb, conclude that trade unions are preparing the way for 
the great co-operative commonwealth or socialistic state which 
they think is in process of development. Whether they are 
right in this anticipation or not, there can be no question of the 
value of membership in a trade union as training for useful 
citizenship. 

Still another service rendered by trade unions is in connec- Active in 
tion with labour legislation. Through their very position trade Needed^ 
unionists are led to recognise the need for labour laws before it Labour 
is appreciated by the whole communit}^ Again and again ^^^ 
in Great Britain and the United States their agitation has 
secured the enactment of beneficent labour regulations. It 
would be exaggerated praise to ascribe to them all the progress 
that has been made in this field, or to maintain that they have 



4IO The Labour Movement 

not at times agitated for bad as well as for good labour laws ; 
at the same time trade unions deserve more credit than any- 
other single agency for what has been accomplished. 
The Future § 233. Prediction in reference to the future of trade unions 
Labour would be both hazardous and out-of-place in this connection. 
Movement but a few suggestions may be ventured as a conclusion to this 
sketch of the labour movement. There can be little question 
that trade unions have come to stay so long as the present or- 
ganisation of industrial society is maintained. For employers 
to fight against them is as idle as it is for the whole community 
to fight against combination and organisation on the side of 
employers themselves. What is to be opposed is not trade 
imions, which deserve encouragement and assistance on the part 
of all who are really interested in the improvement of the work- 
ing masses, but the monopolistic tendencies of unions. The 
latter are bad, not alone for the reasons enumerated, but because 
they foster a type of labour leader who thrives on corruption 
and blackmail, rather than because of his services to the cause 
of labour. The indications of these monopolistic tendencies are 
rules which limit apprentices, not by requiring that period of 
tuition necessary to thorough mastery of the trade, but abso- 
lutely, so that the supply of master workmen is prevented from 
growing with the expansion of the demand for their services; 
high initiation fees and other bars to free entrance to the union 
on the part of men competent to carry on the trade, coupled 
with uncompromising hostility to non-unionists ; opposition to 
manual training, trade schools, and other plans for increasing 
the industrial efficiency of the whole working population, and, 
in short, disregard of the interests of workmen generally 
s, through exclusive regard to the interests of members of par- 

ticular unions. These phases of trade unionism ought to be 
opposed not only by employers, but by all disinterested students 
of the labour problem. They are, of course, no more blame- 
worthy on the part of workmen than are similar efforts on the 
part of other individuals who would like to protect themselves 
from the wearing pressure of competition and enjoy monopoly 
earnings, but they are socially disadvantageous and therefore 
to be frowned upon. The future of trade unions must depend 
largely on the promptness with which workmen and the public 



Future of the Labour Movement 411 

learn to distinguish between the good and the bad in the labour 
movement, and the thoroughness with which the latter is 
stamped out by public opinion backed, if need be, by repressive 
legislation. 

REFERENCES FOR COLLATERAL READING 

The literature of the labour movement in the United States is, con- 
sidering the importance of the subject, extremely limited. The 
following titles deserve mention : Ely, The Labour Movement in 
America (now out of date), and article on *Trade Unions (in the 
New International Encyclopaedia); ^Brooks, The Social Unrest; 
*Levasseur, The American Workman ; ^Mitchell, Organised 
Labour; National Conference on Industrial Conciliation and In- 
dustrial Conference of the National Civic Federation, igot and 
1902 ; Reports of the United States Department of Labour ; Bul- 
letins of the United States Department of Labour ; Reports and 
Bulletins of the Bureau of Labour of Massachusetts ; Reports 
and Bulletins of the Department of Labour of New York (these 
official publications are invaluable sources of information) ; The 
American Federationist (published by the American Federation 
of Labour) ; Report of the Commission on the Anthracite Coal 
Strike (1Q03); Report of the United States Industrial Commission, 
Vols. VII., VIII.. XII., Xrv., and XVIL; * Adams and Sumner, 
Labour Problems; ^Gzlman, Methods of Industrial Peace; *Com- 
7nons, Trade Unionism and Labour Problems. 

The labour movement in Great Britain receives consideration in the 
following works : ^Sydney and Beatrice Webb, Industrial Democ- 
racy, and History of Trade Unionism ; Reports of the Board of 
Trade (British) on Labour Statistics ; de Kousiers, The Labour 
Question in Britain; * Drage, The Labour Problem; * Report 
of the Royal Commission on Labour (1894) ; Howell, Trade Union 
Law, and Labour Legislation, Labour Movements and Labour 
Leaders. 

New Zealand's experiment with Compulsory Arbitration is discussed 
in the Report which Judge Backhouse prepared for New South 
Wales entitled, *Report of the Royal Commission on the Working of 
Compulsory Arbitration Laws, and in Chap. I., Vol. II., of * Reeves, 
State Experiments in Australia and New Zealand (bibliography). 



CHAPTER XXII 

THE LEGAL REGULATION OF LABOUR 

Reasons for § 234. The laissez-faire, or let alone, policy, which was sub- 
Regulation stituted for the policy of legal restriction in Great Britain dur- 
of Labour j^g ^j^g f^j-gt half of the last century, has been subject to one 
important exception. It has never been allowed to include 
fully the relations between employer and employee. Reasons 
for this exception were suggested in the last chapter, but they 
must now be explained at greater length as an introduction to 
a brief discussion of the labour laws in force in different coun- 
tries and the need of still further restrictions. 
Employees Unorganised workmen do not bargain on terms of strict 
always equalit}?- with employers. That this is the case when the 

Bargain on workers are children will scarcely be questioned by anyone. 
Terms with Employers of such labour stand to it in a relation half paternal 
rvM°^^^^' ^^^ have it in their power to make or mar the young lives that 
are devoted to their service. It might be thought that con- 
siderations of common humanity would lead employers of chil- 
dren to fix hours and other conditions of employment that 
would not be injurious to them. Unfortunately this is not the 
case. In every country labour laws have been found neces- 
sary to protect children from the rapacity and cruelty not only 
of employers, but even of their own parents. 
Women It is generally, although not universally, conceded that pro- 

tective labour laws ought to extend to women as well as to 
minors. Such extension is defended by those who think the 
activity of women should be confined as far as possible to the 
domestic circle, on the ground that women are unfitted for the 
rough and tumble of industrial competition and if permitted to- 
work for wages at all, should do so on conditions marked out 
for them by law. A reason less open to objection is the simple 
fact that women have not yet learned to organise unions or to 
protect themselves in other ways and are therefore the prey of 
unscrupulous employers when the law fails to protect them. 

412 



Purpose of Protective Laws 413 

If the second of the above reasons is accepted as a justifica- ^^en 
lion for laws protecting women wage-earners, there seems no 
reason why such laws should not be extended to men in those 
trades in which they do not bargain on equal terms with their 
employers. This view appears to be gaining ground and 
has, as we shall see, already found expression in connection 
with legislation affecting the so-called sweating trades. 

Another reason for protective labour laws, than inequality Dangerous 
between employers and employees, is the ignorance and care- ^^ ^^ 
iessness of the latter. Ignorance often leads workmen to 
assume risks and undertake tasks on terms that they would not 
with full knowledge accept. Once committed, the inertia that 
is characteristic of all men prevents them from repudiating 
their bargains. Carelessness is an even more common cause of 
contracts of employment that are socially undesirable. This is 
conspicuously the case in dangerous trades. The natural 
optimism of workmen leads them to feel that whatever the dan- 
gers may be, they themselves will escape. The result is that 
they accept risks, even certainties, of disease and death on 
terms that compensate neither them, their families, nor society 
at large for the waste of life which such employments entail. 
It is on this account that special legislation in reference to the 
conditions of employm.ent in dangerous trades has been found 
necessary, and on it also are based the laws in reference to em- 
ployers' liability for injuries to their employees and industrial 
insurance that are discussed in Section 244. 

In drafting protective labour laws, it is hardly necessary to Purpose of 
add, the end to be held constantly in view should be the good P^^ective 
of the whole community. This should be conceived in no nar- 
row spirit, but should take full account of the effect of restric- 
tions on slowly evolving society. A temporary benefit should 
not be preferred if its result is likely to be the conserv^ation or 
encouragement of an undesirable type of person, nor should 
temporary inconvenience or loss be shunned if its long-run re- 
sult is likely to be advantageous. 

§ 235. The history of labour legislation in Great Britain is History 
instructive on many accounts. No country has gone further in Leo^^lat^on 
its adoption of the laissez-faire policy as regards other Indus- in Great 



trial relations and in none have the successive steps in the de- 



Britaiii 



414 The Legal Regulation of Labour 

velopment of the comprehensive law which now protects not 
only children and women, but adult men, been so vigorously 
opposed or finally passed on the basis of such careful study of 
actual conditions. 

1802-1831 The first five acts to be passed from 1802 to 183 1 applied 

only to cotton mills and were so moderate in their requirements 
as to present a striking contrast to the laws now in force. The 
Act of 1802 sought to correct the frightful abuses to which the 
apprenticeship system had given rise, by limiting the work of 
apprentices to twelve hours a day and protecting them in other 
ways. The Act of 1819 applied to all children employed in 
cotton mills. It prohibited the employment of children under 
nine years of age and limited the work of those under sixteen 
to twelve hours a day or seventy-two a week, no part of which 
should be performed at night. Finally the act of 1831, while 
re-enacting earlier restrictions, prohibited altogether night 
work for minors and limited the hours of those under eighteen 
to twelve a day and nine on Saturday, or sixty-nine hours a 
week. 

Act of 1S33 After 1831 the agitation for labour laws assumed a more 
radical tone and each new act was made the basis for still fur- 
ther demands. Successive royal commissions were appointed 
to investigate the conditions of employment in diiferent trades 
and their reports supplied abundant material for the advocates 
of protective laws. The Act of 1833 applied to all textile mills 
and extended to them (except silk mills) the restrictions of the 
Actofi83i. It added the important distinction between " chil- 
dren " (from nine to thirteen years of age) and " 3^oung per- 
sons" (from thirteen to eighteen), and limited the labour of 
■the former to forty-eight hours a week. It also created four 
factory inspectors to enforce the law and required age certifi- 
cates to be made out by physicians rather than by parents as 
theretofore. 

Mining ^ The next important advance was in connection with the min- 

ing-industry, conditions in which had been shown to be particu- 
larly distressing by the Report of the Royal Commission ap- 
pointed in 1840. " A very large number of labourers employed 
were under thirteen, since children, on account of their diminu- 
tive size, were best fitted to draw the loads through the Icm 



Act of 1842 



The Present Law 415 

galleries. Girls and adult females performed the same work 
as the men. . . Very often children of both sexes worked to- 
gether in a half-naked state. . . The workmen were in most 
cases crippled and simultaneously subject to an abnormal de- 
velopment of certain muscles and to numerous diseases, espe- 
cially of the respiratory organs. . . Immorality and ignorance 
prevailed to a most frightful extent." * The Mining Act of 
1842 attempted to correct these evils by prohibiting altogether 
imderground work by women, or by boys under ten years of 
age, and by imposing other restrictions. 

The Factory Act of i8^^ had proved unsatisfactory from the '^^^^ 
administrative point of view because it failed to specify with l^w 
sufficient exactness the hours within which work might be per- 
formed by the protected classes. This defect was corrected by 
the act of 1844, which provided that children might work six 
and one-half hours a day either in the morning or in the after- 
noon, or ten hours on alternate days, and that young persons 
and women might work twelve hours a day (nine on Satur- 
day), but that these hours plus one hour and a half for meals 
must be counted continuously from the time v/ork was begun 
in the morning. The addition of adult women to the protected 
classes appears to have attracted little attention at the time, al- 
though its effect has been to limit the work of adult men em- 
ployed in the textile industries to the same hours, since it does 
not usually pay to keep the machinery in motion for their ex- 
clusive benefit.f Since 1844 efforts have been directed towards 
limiting still further the hours of the protected classes and ex- 
tending similar regulations to all industries. By successive 
acts the minimum age at which children may be employed in 
factories or workshops has been raised to ten, eleven, and finally 
twelve (1874, 1 89 1, 1895) ; the employment of children under 
fourteen has been more rigidly restricted, with a view to 
insuring their continuance in school ; the hours of young per- 
sons and women have been reduced until they are now fifty-five 
a week in textile and sixty in non-textile factories ; the latter 

* Von Plener, English Factory Legislatio7t, pp. 23-25. 

\ According to the report of the factory inspectors, the men em- 
ployed in the textile industries in 1847 numbered only 181,080 out of 
a total of 544,876 hands. 



Constitu- 
tionality 
of Labour 
Laws in the 
United 
States 



Conflicting 
Decisions 
of Ameri- 
can Courts 



416 The Legal Regulation of Labour 

and workshops have been subjected to regulations similar to 
those applying to textile factories ; dangerous trades have been 
regulated ; and the machinery for enforcing all labour laws has 
been perfected until violations are conspicuous by their rarity. 
The Factory and Workshop Act passed August 17, 1901, 
codifies all of this legislation into a statute of 163 sections and 
covering over one hundred finely printed octavo pages, and it 
is to this that reference is made in future sections when the 
present law of Great Britain is mentioned. 

§236. The development of the system of labour laws just 
described was untroubled by any question of constitutional au- 
thority, since under the English system Parliament is supreme. 
In the United States a constant obstacle to the legal regula- 
tion of labour has been the written constitutions. As inter- 
preted by the courts both the State and the Federal constitu- 
tions guarantee freedom of contract and immunity from special 
or class legislation. These guarantees are not absolute. All 
authorities agree that they may be set aside when necessary in 
order to protect individuals in their lives, their health, their 
morals, or their property, that is, in the exercise of the state's 
" police power ; '' but unless a labour law can be shown to have 
this for its purpose and to be reasonably calculated to achieve 
its object, it will be declared unconstitutional. 

A study of American decisions in cases involving labour laws 
is well calculated to confuse even the legal mind. There is 
scarcely a regulation, from a simple restriction on the age at 
which children may be employed to the provision that men may 
work only eight hours a day in specified industries, that has not 
been declared unconstitutional in certain sections of the coun- 
try, only to be upheld as a legitimate exercise of the police 
power in others. The Supreme Court of Pennsylvania char- 
acterised an act prohibiting the payment of wages in orders on 
a company store as " utterly unconstitutional and void " and 
went on to say that it represented " an insulting attempt to 
put the labourer under a legislative tutelage, which is not only 
degrading to his manhood, but subversive of his rights as a 
citizen of the United States," and yet such measures have been 
wpheld in most of the other States as proper and beneficent re- 
strictions. The Supreme Court of Illinois declared an eight- 



Decisions of American Courts 417 

Mour law applying to women employed in the sweating trades 
unconstitutional on the ground that it involved class legisla- 
tion, and yet the courts in Massachusetts, New York, and even 
Pennsylvania have affirmed the right of the legislature to single 
out women and the sweating trades for restrictions which do 
not apply generally throughout the community. Finally the 
Supreme Court of Colorado declared unconstitutional an eight- 
hour law applying to men employed in the mining and smelt- 
ing industries on the ground that if such a law was calculated 
to protect the health or morals of anybody, it could only be of 
the very men whose work was restricted, and that the legis- 
lature had no right to restrict freedom of contract for the 
benefit only of the persons whose liberty was thus limited ; and 
yet the Supreme Court of the United States had declared in 
upholding the constitutionality of an identical statute previously 
passed by the State of Utah, that the legislature had the right 
to protect an individual even " against himself," on the ground 
that " the state still retains an interest in his welfare no matter 
how reckless he may be," and that when " the individual health, 
safety, and welfare are sacrificed or neglected the state must 
suffer." In all of these cases, except the last, the difference of 
opinion concerns not the principle involved, but its appHcation, 
and it requires no great insight to perceive that the really de- 
termining consideration was whether the particular measure 
was deemed wise and beneficent or the reverse. If expedient, 
a restriction on labour must in the nature of the case be calcu- 
lated to protect the health or morals, at least of the protected 
classes. If inexpedient, it becomes thereby an illegitimate 
exercise of the police power for the sim.ple reason that it is not 
calculated to secure, in a large sense, the ends for the realisa- 
tion of which that power exists. It follows that the constitu- 
tional obstacle to labour legislation in the United States may 
be expected to give way as soon as public opinion, and particu- 
larly judicial opinion, has been educated to the point where it 
approves of such legislation. As laws that may be passed in 
this field are not likely to be enforced unless public opinion is 
behind them, this obstacle ought not to retard unduly the enact- 
ment of such restrictions as industrial conditions call for. In 
fact, up to the present time, there have been few occasions on 



41 8 The Legal Regulation of Labour 

which labour laws which have been really demanded by public 
opinion have been declared unconstitutional, 
pecision § 237. When a labour law is declared unconstitutional by the 

Eio-ht-hcrar highest tribunal in a State there is no appeal, as it is the supreme 
Law Case interpreter of the State constitution. When declared consti- 
tutional, however, it must still, if an appeal be taken, run the 
gauntlet of the United States Supreme Court since the rights 
which it infringes are protected also by the Federal Constitu- 
tion. Among the decisions which have been rendered by the 
latter tribunal none is more significant than that handed down 
on February 28, 1898, in the Utah Eight-hour Law Case, 
already referred to. The law under consideration limited the 
work of all employees engaged in the mining and smelting in- 
dustries to eight hours a day, and allowed exceptions only when 
life or property should be in danger. It was thus an extreme 
type of protective legislation, goijtig far beyond anything pre- 
viously tried in Great Britain. Nevertheless the Supreme 
Court declared it a legitimate exercise of the police power and 
therefore constitutional. Because of its authoritative character 
the grounds on which the decision in this case was based merit 
brief consideration. After explaining the nature of the police 
power and citing decisions showing the field within which it 
may be exercised, the court concludes * that, " while it cannot 
be put forward as an excuse for oppressive or unjust legisla- 
tion, it may be lawfully resorted to for the purpose of preserv- 
ing the public health, safety, or morals, or the abatement of 
public nuisances, and a large discretion is necessarily vested in 
the legislature, to determine, not only what the interests of the 
public require, but what measures are necessary for the protec- 
tion of such interests." It then reviews sanitary and safety 
regulations applying to the mining and smelting industries, 
which had been held to be constitutional, to emphasise the fact 
that these had been recognised as dangerous trades. Although 
such regulations were designed to protect the lives of employees 
in these industries, the court argues that it would be equally 
competent for the legislature to enact regulations for the pro- 
tection of their health, and cites quarantine, and child and 
women labour laws as cases in point. Coming, then, to the law 
*i8 Supreme Court Reporter, p. 383 et seg. 



Value of this Precedent 419 

in question, the court quotes with approval the reasoning of the 
Supreme Court of Utah. Employment in the specified indus- 
tries must be conceded to be unhealthftil if too long con- 
tinued. " Twelve hours per day would be less injurious than 
fourteen, ten than twelve, and eight than ten. The legislature 
has named eight. Such a period was deemed reasonable." The 
law is, consequently, a health regulation calculated to accom- 
plish the object aimed at. Any mere doubt on the point should 
be resolved in favour of the legislature, which must be assumed 
to have passed the law in good faith and after careful delibera- 
tion. The court then turns to more general considerations. It 
affirms the propriety of labour laws on the general ground that 
employers and employees are unequal in bargaining power. 
" The former naturally desire to obtain as much labour as pos- 
sible from their employees, while the latter are often induced by 
fear of discharge to conform to regulations which their judg- 
ment, fairly exercised, would pronounce to be detrimental to 
their health and strength. In other words, the proprietors lay 
down the rules, and the labourers are practically constrained to 
obey them. In such cases self-interest is often an unsafe guard, 
and the legislature may properly interpose its authority." 
Finally, it affirms the principle already quoted, that in the exer- 
cise of its police power the legislature has the right to protect 
a man even against himself. 

The reasoning in the above decision is admirable whether Value 
judged as law or as economics, and its general acceptance by p % 
.State courts in the United States may be counted upon to re- 
lieve all desirable labour restrictions from the ban of uncon- 
stitutionality. Especially worthy of attention is its insistence 
that the presumption in labour cases should be in favour of 
constitutionality, on the ground that the legislature is in closer 
contact w^ith the actual conditions of industrial life than the 
courts and better able to judge when the public health is en- 
dangered and by what measures it may be protected. If this 
view were always taken by the courts, scope would be afforded 
for legislative experiments in the field of labour regulation 
which might be of value not only to the United States, but to 
the world. 

§ 238. In the United States, as in Great Britain, the develop- 



Child 
Labour 
Laws in 
the United 
States 



Purpose of 
Snch Laws 



420 The Legal Regulation of Labour 

ment of child-labour laws has been closely connected with the 
growth of public schools to serve as substitutes for the factory 
and workshop. Those States which have given most attention 
to questions of education, like Massachusetts and New York, 
have adopted the most rigid child-labour laws. On the other 
hand, the States whose public educational systems are back- 
ward, as are those of the Southern States, either have lax child- 
labour laws or are entirely without them. In general, the child- 
labour regulations of the United States are more exacting than 
those of Great Britain, but less rigidly enforced. Thus in 
Massachusetts and New York no child under fourteen (instead 
of twelve as in Great Britain) may be employed in any factory, 
workshop, or mercantile establishment, and children between 
the ages of eight and fourteen must attend school during the 
entire school year; but evasions, especially in the latter State, 
have been common. At the other extreme are some of the 
Southern States, which impose such moderate restrictions as 
that children under twelve shall not be employed at all, and 
those between twelve and fourteen shall work not over ten 
hours a day (Virginia), or leave child-labour quite un- 
regulated. 

It needs no argument at this stage of the discussion to prove 
that the interests of society require that provision be made for 
the careful training, at public expense, of every boy and girl 
up to the age of sixteen if not of eighteen.* Merely as a com- 
mercial investment, public money spent on such training is sure 
to yield a princely return in the superior industrial efficiency of 
the population. In order to insure that full advantage will be 
taken of the public schools it is necessary to restrict the em- 
ployment of children more rigidly than regard merely for their 
physical development would require. On this ground the 
prohibition of the employment of children under fourteen 
should be looked upon as only a beginning. By successive 
steps the minimum age of employment should be raised at least 
to sixteen, and school facilities should be increased and im- 
proved so that all children up to that age can be given the best 
educational advantages. 

§ 239. As regards the labour of women, restrictions in the 
United States are, on the whole, less rigid than in Great Britain. 
*C/". Chapter VII., Section 68, and Chapter XIII., Sections 138 and 139- 



Laws Regulating Labour of Women 42 1 

Thus in Massachusetts and New York the maximum working Laws 
periods for women employed in factories are fifty-eight and Labom-'of^ 
sixty hours a week, respectively, as compared with fifty-five in Womea 
textile and sixty in non-textile factories in Great Britain. Sev- 
eral of the States, moreover, impose no restrictions whatever on 
the employment of women, and in at least one (IlHnois) such 
special restrictions have been declared unconstitutional. The 
opposition to such regulations, so far as it is disinterested, is 
based on the fear that they may serve to undermine the spirit 
of independence of the protected persons. Experience seems 
to indicate that they have, in fact, a directly contrary effect. 
By preventing employers from prescribing working hours that 
would be detrimental to the health of their women employees, 
they permit the latter to retain that state of mind and body that 
is indispensable to any real independence of thought or action. 
So long as the restrictions apply generally to all women and are 
neither extreme nor unreasonable, there is nothing in them to 
lessen the self-respect of the protected classes. They are ac- 
cepted like other conditions over which the parties affected have 
no control, without lessening in the least their determination in 
dealing with those other conditions which they may hope to 
modify. The reasons for regulating the employment of women 
apply with special force to those who are married. In Great 
Britain the law prohibits the employment of such women within 
four weeks after childbirth, and all medical authorities agree 
as to the importance of such a restriction, where experience 
shows it to be necessary. Many thoughtful persons think that 
the law should go even further and either prohibit altogether 
the employment of married women in shops or factories or 
limit it to married women without infant children. Desirable 
as such a limitation would be in most cases, the impossibility of 
enforcement is a decisive objection to it. It seems wiser to rely 
upon the education of married women themselves and their 
husbands, and upon the influence of public opinion, to restrict 
the employment of married women to cases in which it in- 
volves no sacrifice of the interests of children. Up to the 
present time, in the United States, at any rate, the employment 
of married women has been too unusual to call for legislative 
interference. 



The 

Agitation 

for a 

Universal 

Legal 

Eight-hour 

Day 



Objections 
to Plan 



422 The Legal Regulation of Labour 

§ 240. Restrictions in reference to hours of employment, im- 
posed in some instances by law and in some by the rules of 
trade unions, have advanced so far in Great Britain and the 
United States that there is now widespread agitation for a 
legal eight-hour day, to apply to all employees in all trades. 
This period of employment has already become general for 
Government empIo}'ees in both countries. It is common in the 
building and other skilled trades. In other employments, nine, 
ten, and even twelve-hour periods are still the rule, but many 
people believe that the time is ripe for the change to eight 
hours. 

Much as may be said in support of a further shortening of 
the working day in many emploA-ments, the proposal that a 
uniform period be made to apply to all alike seems unsupported 
either by reason or experience. Different occupations make dif- 
ferent demands on the strength and nervous energy of work- 
men, and a workday that would be moderate for one kind of 
employment would be excessive for another. These differences 
have been considered in the development of protective labour 
laws in the distinctions made in all countries between manufac- 
turing and mercantile pursuits, and in Great Britain between 
textile and non-textile factories. To disregard them by estab- 
lishing a uniform eight-hour day would be to take a backward 
step. It is doubtless true, as urged by advocates of the eight- 
hour day, that its adoption for certain trades would involve no 
permanent lessening of the productiveness of a day's labour. 
The shorter work period would insure more active and intense 
exertion on the part of workers than they can maintain when 
employed for nine or ten hours. On the other hand, it is 
equally certain that in other trades reducing hours to eight a 
day would reduce the output proportionately. The effect of 
this in the long run would be to reduce wages correspondingly, 
and it is highly probable that such a reduction in wages would 
in many cases inflict more injury than the shorter working 
day could compensate. It would seem better for each country 
to proceed piecemeal towards the realisation of shorter work- 
ing hours for all employees as in the past, rather than to 
adopt all at once a regulation which could not but be disad- 
vantageous to many and might prove unsatisfactory to all. 



The Sweating Evil 423 

The above objections to an eight-hour law applying to all Restric- 
Occupations do not involve any criticism of the policy of re- Labour 
stricting by law the hours of men as well as of women. Skilled of Men 
workmen, especially when organised in trade unions, do not 
usually require such protection. To unskilled workmen, how- 
ever, it may be the indispensable means to the attainment of a 
higher standard of living and of industrial efficiency. The 
argument that it serves to undermine the spirit of independ- 
ence has already been examined and rejected. Those who ad- 
vance it fail to consider that deadening and monotonous toil 
too long continued is much more inimical to the spirit of in- 
dependence than any amount of regulation. They also ignore 
the fact that restrictive labour laws are usually passed out of 
deference to the wishes of those they are designed to protect, 
and that they are often the only means by which a determined 
m^ajority may prevent an ignorant or selfish minority from 
blocking progress. Here, as elsewhere, it is often desirable for 
the state to interfere to establish the plane of competition, and 
experience affords no ground for the view that self-reliance 
and the spirit of self-help are lessened by an exercise of legis- 
lative authority to advance this plane to a higher level. 

§ 241. Industrial progress, like progress in other fields, has The 
its dark as well as its bright side. The dark side in connection ^y'^^*^'^^^ 
with conditions of employment is presented in the so-called 
" sweating trades." These are carried on in large cities every- 
where and have even spread to country districts. A descrip- 
tion of the system as it prevails in connection with the 
clothing industry will reveal its salient features. As this indus- 
try is now carried on, it is divided into various stages. Cutting 
the cloth from which garments are to be made is performed 
under the direct superintendence of the manufacturer. The 
pieces are then tied in bundles and turned over to contractors 
who agree to have them made up at so much a garment. The 
latter convey them to their shops, the " sweat-shops " proper, 
and either have the work done there under their own super- 
vision by poorly paid and overworked men, women, and chil- 
dren, or else subcontract them to men and women who make 
them up in their own hom^es. The condition of home-workers 
is often more wretched than that of the sweat-shop employees 



Couditions 
in tlie 
Clotjiing 

Trades 



424 The Legal Regulation of Labour 

with whom they compete, since they are forced to convert their 
homes into workshops, to the sacrifice of all of the privacy 
and much of the sweetness of family life. 

The evils that result from the sweating system are that wages 
are low and unequal for the same kinds of work, employment 
is irregular, hours are long, the premises on which the work is 
done are insanitary, and, finally, there is little chance for ad- 
vancement in the trade for the rank and file of workers. The 
system owes its existence to a number of causes. In the first 
place, the work to be done is of the simplest character, and any 
person of ordinary intelligence can learn to do it, after a 
fashion, after a few hours' instruction. This throws it open 
to the competition of men, wom.en, and children of all classes 
and conditions. Home work is taken by the well-to-do wives of 
labourers as a means of securing pin-money, and also by poor 
widows struggling to keep their children from starvation. Men 
too old for any other kind of work sew side by side with young 
children who ought to be in school. The consequence of this 
competition is that the labour market is always overstocked and 
wages correspondingly depressed. In the cities of the United 
States competition for employment in the sweating trades is 
made especially severe by the steady influx of immigrants, 
many of whom find this species of work the easiest to take up, 
and do not learn, until after they have been in the country some 
time, how much worse off they are than American workmen in 
other trades. Another cause is the ignorance and comparative 
isolation of the workers. This applies especially to those who 
work at home. They go to the contractor, or " sv/eater," singly 
or in pairs, and have to rely largely on his fairness in deter- 
mining what they ought to get for their work. In American 
cities the contractors are usually Jevs^s and the home-workers 
Italians, so race and religious antipathy play their part in con- 
nection with the sharp practices of which the former are guilty. 
The success of the sweater depends upon the shrewdness and 
relentlessness with which he takes advantage of his position. 
He makes a special bargain with each outworker and gets the 
best terms he can, irrespective of what he is paying others for 
the same work. The different piece prices to which this may 
give rise was illustrated in Philadelphia during the Spanish- 



Australasian Experiments 425 

American War, when army trousers, all of which had to be 
passed upon by the same Government inspectors, were being 
made up in different shops for from thirty-five to seventy-five 
cents a garment. Still a third cause of the system is the irreg- 
ularity of the demand for the goods produced. At certain 
seasons work is active and contractors who have taken 
" hurry-up orders " drive their employees to the extreme limit 
of human endurance. At other times work is scarce and the 
competition for it is so severe that earnings are reduced to a 
starvation level. This irregularity is perhaps the worst aspect 
of the sweating system, since it is destructive alike of health 
and character. 

§ 242. It is easier to perceive the causes of the sweating Remedies 
system than to devise remedies, and yet much has already been QJ^g^t ^ 
done to improve conditions. In American cities the plan is being Britain 
tried of requiring premises in which the sweating trades are united 
carried on to be licensed for the purpose, and of making the States 
issue and continuance of licenses contingent on compliance with 
sanitary and labour regulations. The factory inspectors are re- 
quired to inspect the shops and homes in which such work is 
performed and to hold contractors responsible for work done in 
unlicensed premises. In Great Britain a further step has been 
taken by making the manufacturers for whom the work is being 
done responsible for the sanitary condition of the premises in 
which it is performed, after notification by the inspector that 
these premises are unsatisfactory. Either system requires for 
its successful operation a larger force of factory inspectors than 
has yet been provided. In New York City, where there were 
on March 31, 1903, over 24,000 licensed v/ork-places, the staff 
of inspectors permits on the average but two inspections a year. 
Obviously, under such circumstances many violations of the law 
must escape detection. Even if rigidly enforced, the measures 
thus far taken in Great Britain and the United States would 
remedy only one phase of the sweating evil, that is, the sanitary 
conditions under which work is carried on. The long hours 
and low wages, which are its worst features, remain unaffected. 

The most drastic remedy yet applied to the sweating evil was Austral- 
adopted by the state of Victoria, Australia, in 1896, through ^^^^ ._ 
the creation of wage boards consisting of from four to six ments 



426 The Legal Regulation of Labour 

members to be chosen one-half by employers and one- 
half by employees and empowered to fix not only wages, 
but hours of labour and the proportion of apprentices to 
be employed in the designated industries. The decisions 
arrived at by these boards are binding on the whole trade, 
and can be reversed only by the Supreme Court. Under 
this system, applying now to more than thirty trades, 
minimum wages both for time and piecev/ork have been 
established and maximum hours of employment prescribed. 
The available evidence indicates that conditions in the sweating 
trades have been materially improved, and that, incidentally, 
home work in certain trades has been rendered unprofitable. 
Of course, one effect of the change has been to increase the 
number of persons in the colony who are dependent on public 
charity, but the exclusion of these incapables from the ranks of 
the employed is believed to have been good both for them and 
for the more efficient. In practice, New Zealand's system of 
compulsory arbitration has secured for many of the sweating 
trades v/ages and hours determined by judicial decree, and in 
the opinion of many persons the results of this method are even 
superior to those of Victoria's wage boards. The essential 
characteristics of both are that considerations of social expe- 
diency and general good are substituted for blind competition 
as the regulators of conditions of employment, and standards 
are fixed which insure to those who can obtain em^ployment 
living v^rages and reasonable hours. The inefficient, who are 
" unemployable " under the new conditions, become objects for 
public charity, and experience seems to prove that the whole 
cost of their maintenance is less of a tax on the social organism 
than was their competition when they were allowed to partly 
maintain themselves. 
Conclusion Both New Zealand's and Victoria's plans for solving the 
sweat-shop problem are dismissed as too radical by English and 
American students of the evil. The further remedies that are 
advocated for the sweating system as it exists in the United 
States are additional restrictions on immigration, more rigid 
sanitary regulations, and a provision that all garments made in 
tenement houses shall bear a " tenement-made " label as a 
warning to consumers that they are buying sweaters' products. 



The Regulation of Dangerous Trades 427 

There is little question but that these changes in the law, 
coupled with provisions for more rigid enforcement, would 
cause improvement, but it is doubtful whether the evil can be 
corrected by such simple means. It is too soon to pronounce the 
Australian plan of establishing minimum wage rates by public 
boards or tribunals a success, but in the opinion of many per- 
sons only some such remedy, which goes to the root of the diffi- 
culty, can fully correct the evils of the system. 

§ 243. Besides the sweating trades there are others which The 
require special regulation on the ground that they are danger- of^DaoJer^ 
ous to life or health. All manufacturing industries which use ous Trades 
power machinery are dangerous to a certain extent, and experi- 
ence has taught the wisdom of requiring that revolving ma- 
chinery be fenced and that the cleaning of machines while in 
Tnotion be either prohibited altogether or limited to adult work- 
men. In addition to these general regulations, which are now 
included in the factory laws of all progressive countries, expe- 
rience has shown the need of special restrictions on particular 
trades. Occupations connected with the cleaning of textile 
fabrics and the polishing of metals are peculiarly unhealthful, 
as are also those concerned with the manufacture of white lead 
and of most chemicals. In the transporting and mining indus- 
tries the rate of mortality is very great and can only be kept 
down by legal interference, since even such simple appliances 
as safety lamps and automatic couplers are introduced but 
slowly by employers unless their use is made obligatory. 

Great Britain has gone much further than any of the States System in 
of the United States towards the adequate regulation of danger- g^^^in 
ous trades. The present system of that country is to vest large 
discretionary powers in reference to the control of dangerous 
trades in the Home Secretary. Medical practitioners are re- 
quired to report illness which they believe to be due to unhealth- 
ful conditions of employment to the factory inspector, and the 
latter, as soon as he becomes persuaded that a trade is danger- 
ous and in need of special regulation, is required to bring the 
matter to the attention of the Home Secretary. That officer, if he 
deems it necessary, drafts, with the assistance of experts, rules 
calculated to meet the needs of the situation and sends copies of 
them to the employers who will be affected, with the request 



Employers' 
Liability 



In the 

United 

States 



The 

Workmen's 
Compensa- 
tion Act 
of Great 
Britain 



428 The Legal Regulation of Labour 

that they file their objections to them within twenty-one days. 
These are carefully considered, and revised rules are then issued 
which have the force of law unless vetoed by either House of 
Parliament. This system has the great merit of adapting itself 
readily to changing conditions, and might with advantage be 
copied in its important features in the United States. 

§ 244. No matter how rigid the regulations in reference to 
dangerous trades, accidents to employees resulting in temporary 
or permanent disability, or even death, are certain to occur„ 
Under the common law of negligence as interpreted by English 
and American courts, employers are liable for damages when 
accidents are due to their personal negligence. When, how- 
ever, an accident is due to unpreventable causes or to the care- 
lessness of the employee himself or one of his fellow em- 
ployees, no liability attaches to the employer. In such cases, 
unless damages can be collected from the fellow employee re- 
sponsible, the entire loss must be borne by the unfortunate vic- 
tim of the accident and his family. The impolicy and injustice 
of this arrangement have long been appreciated, and have led to 
the modification of the law of employers' liability in several 
different directions. 

In the United States all that has thus far been done has been 
to extend the employer's liability to cases in which accidents 
are due to the carelessness of his representatives. Thus by the 
Employers' Liability Law adopted by New York in 1902, the 
employer is responsible for any accident to an employee, " him- 
self in the exercise of due care and diligence at the time," due 
to any defect in the condition of the ways, works, or machinery 
used in the business traceable to the negligence of employees 
responsible for the care of such ways, works or machinery, or 
to the negligence of an authorised superintendent of the em- 
ployer. For accidents due to the negligence of employees of 
the same or of an inferior grade to the victim, employers 
would not, under this act, be liable. 

A similar law to that of New York was adopted by Great 
Britain as early as 1880, but was found insufficient as a remedy. 
At the instance of Mr. Joseph Chamberlain, an entirely new 
policy, known as that of " workmen's compensation," was intro- 
duced through an act passed in 1897. By this measure, which 



The British Workmen's Compensation Act 429 

applies to all of the large-scale industries of the country, em- 
ployers are required to compensate, according to a fixed scale, 
workmen or their families for accidents sustained in connec- 
tion with their employments and resulting in at least two weeks' 
disability, unless such accidents were due to the " serious and 
wilful misconduct of the workman himself." The amount of 
compensation is limited to £i a week in case of temporary dis- 
ability and £300 in case of complete disability or death, and 
simple machinery is provided for determining, without recourse 
to a court, what part of these sums should be paid in any given 
case. In defending this law, Mr. Chamberlain insisted that it 
is not true, as economists are fond of assuming, that wages in 
dangerous trades are enough higher than those in other trades 
to compensate workmen for the risks they take. Even 
if it Were true, it might be added, the difference would not 
compensate the particular workman who was injured unless 
some plan of mutual insurance had been adopted by which the 
extra compensation was placed in a common purse for the bene- 
fit of those upon whom accidents might fall. The only way to 
equalise conditions between safe and dangerous trades, Mr. 
Chamberlain urged, was to throw the burden for compensation 
for accidents upon the employer, who would, in turn, throw it 
upon the consumer by charging somewhat higher prices for his 
goods. " When you enter upon a business," he said to employ- 
ers, " you must consider this compensation as much a trade 
charge as is now the provision which you are called upon to 
make for the repair of machinery. You at present have to put 
aside every year a certain sum for the repair of the inert ma- 
chinery, which is a factor in your business. Now, the human 
element in the business has to be considered, and in case of acci- 
dent what reparation you can make must be made as a charge 
upon the business." The active opposition which the act 
at first encountered appears to have given place to passive 
acceptance of it on the grounds given by its author. Employers 
have been able to transfer to industrial insurance companies 
their liability for compensation under it, and thus accident 
insurance has come in Great Britain to be as normal an item 
among the expenses of production as was fire insurance before 
the Workmen's Compensation Act was passed. The principal 



Continental 
Systems 



Backward- 
ness of the 
United 
States in 
this Field 



430 The Legal Regulation of Labour 

objections to the plan that are now urged are that it does not 
extend to small employers and that the scale of compensation 
is too moderate. 

Schemes of industrial insurance similar to the Workmen's 
Compensation Act described are now well-nigh universal in 
European countries. Perhaps the most elaborate is the compul- 
sory insurance system of Germany, under which employers, 
employees, and the Government all contribute to the insurance 
fund out of which compensation is paid to workmen in case of 
accident or illness. The principal objection to be urged against 
this plan is that the cost of its administration is out of propor- 
tion to the benefits which result from it, but this may easily be 
exaggerated through failure to appreciate the saving in the cost 
of administering public and private charities that may properly 
be credited to such a comprehensive system of industrial insur- 
ance. 

In the field of industrial insurance, as in other fields, Euro- 
pean precedents have had little weight in the United States, 
where there is still a strong prejudice in favour of self-depend- 
ence in all such matters. It is argued that each individual 
should accept the risks of his special occupation or insure him- 
self against them through private industrial insurance compa- 
nies, and that only in this way can the spirit of self-help and 
self-reliance, upon which our advancing civilisation so largely 
depends, be kept alive. The obvious reply to this reasoning is 
that in practice workmen underestimate the risks to which they 
are exposed and fail to insure themselves against them. The 
consequence is that when accidents befall them their families 
are only too apt to be left without adequate provision and to 
become dependents upon public or private charity. In the 
opinion of the author a plan by which compensation for indus- 
trial accidents is made one of the conditions of the labour con- 
tract tends on the whole to promote self-reliance and independ- 
ence among the working classes rather than otherwise, because 
it reduces the amount of enforced dependency. Whether this 
view or the one commonly accepted in the United States is 
correct can only be determined by experience, and for this rea- 
son the results of the experiments now in progress in Europe 
should be watched with interest. 



Arguments for and against Regulation 431 

§ 245. The subject of the legal regulation of labour is one of Arguments 
great complexity. Up to the present time a priori objections to against 
such regulations have delayed their introduction, and only grad- ^® ^f^^^n 
ually, as experience has demonstrated their usefulness, have of Labotix 
they been extended to situations which seem to require them. 
In Great Britain and the United States the notion that the leg- 
islative power should not be used to regulate hours and condi- 
tions of employment has been abandoned by most thoughtful 
persons, but the prejudice against any interference with wages, 
like that practised in New Zealand and other Australian states, 
remains nearly as strong as ever. There is, of course, good 
ground for this distinction. Hours and other conditions of 
employment affect directly the health and vigour of the work- 
ing classes, wages only indirectly. Moreover, workmen are less 
mindful of their own interests in connection with hours and 
sanitary arrangements than in connection with wages. Making 
all allowance for these considerations, many thoughtful per- 
sons still believe that, under certain circumstances, notably 
those found in connection with the sweating system, the reg- 
ulation of wages must also be undertaken by the Government 
if serious evils are to be corrected. It is sometimes argued 
that the law cannot fix the rate of wages, but this is contrary 
both to reason and experience. The law cannot fix both wages 
and the number of persons who shall be employed at those 
wages, but it can declare that no one shall be employed in 
given trades unless paid certain minimum wages, and enforce 
its decree. The result may be an addition to the number of 
dependents who are " imemployable " at the wages fixed be- 
cause too inefficient to earn them, but it may be better and 
cheaper for society to support such persons in almshouses than 
to permit their competition to hold the wages of great sections 
of the population down to a starvation level. In order to 
mark off the dependent from other classes the state may find it 
necessary itself to fix a standard by which the ability of the indi- 
vidual for independent self-support may be determined. With- 
out desiring to advocate the establishment by law of stand- 
ard or minimum rates of wages for the sweating trades, 
the author wishes to insist that there would be nothing 
in this policy inconsistent with the theory of wages that has 



Need of 
Uniformity 
in the 
United 
States 



Ftitur© 



432 The Legal Regulation of Labour 

been explained in these pages, and that it merits the same 
unprejudiced consideration as is now accorded by intelHgent 
people to proposals for restricting the employment of children 
or women, or for requiring the use of safety appliances in con- 
nection with dangerous trades. 

In the United States a serious obstacle to the progress of 
labour legislation has been the inability of State legislatures to 
agree upon uniform laws. Massachusetts has held an honour- 
able place as a leader in factory legislation, but of late years 
proposals for a further restriction of hours have been met there 
with the objection that the cotton mills of the State were al- 
ready carrying on a losing battle against the cotton mills of the 
South, which are free from all but the mildest labour restric- 
tions. Exaggerated as this objection often is it points to the 
need of uniform labour laws, at least for neighbouring States, 
and suggests the desirability of national labour legislation. 
Massachusetts, the State which from its position of leadership 
has most keenly felt the absence of uniformity, adopted, in 1902, 
a concurrent resolution favouring an amendment to the United 
States Constitution which should empower Congress to enact 
uniform labour laws for the whole country. Another move- 
ment in the same direction was the creation, in 1883, of the 
Association of Officials of Bureaus of Labour of America, 
which has worked earnestly to secure uniformity in the factory 
regulations of the different States. The progress towards 
uniformity that has been made encourages the hope that its 
absence may be less of a bar to improved labour regulations 
in the future than it has been in the past. 

The legal regulation of labour, which was scarcely begun in 
the United States prior to the Civil War, has now become one 
of the most important functions of the State governments. 
Departments of factory inspection and bureaus of labour statis- 
tics have been created by all of the States in which manufactur- 
ing is an important industry, and the annual and special re- 
ports of these bodies afiford voluminous information in regard 
to the labour conditions which require regulation. Not a year 
passes that some of the States do not, on the basis of this in- 
formation, add important provisions to their codes of labour 
law and that the machinery for enforcing these codes is not 



The Future 433 

improved. Although much remains to be done, there is per- 
haps no field of legislation in which progress may be so con- 
fidently expected in future years, nor in which the results are 
likely to be more generally beneficial. 

REFERENCES FOR COLLATERAL READING 

The literature bearing on labour regulations is of a somewhat technical 
character. *SiimsoM, Handbook to the Labour Laws, is the standard 
■work for the United States. More exhaustive is the Report of the 
■ United States Department of Labour on Labour Laws in the United 
States (Second Special Report, 1896), which is brought down to date 
by the Bulletins of Labour of the same Department. Volumes V. and 
XVI. of the Report of the United States Industrial Commission 
contain digests of the labour laws of the United States and of foreign 
countries. Discussions of the history and effects of labour legislation 
will be found in North, Factory Legislation in New England 
(against) and Whittelsey, Massachusetts Labour Legislation (for), 
A good statement of the arguments for child labour laws is given 
in * Murphy, The Case against Child Labour, and The South and her 
Children. Other references are given in *Maroi, A Handbook of 
Labour Literature. 

The history of labour legislation in Great Britain is treated in* Von 
Plener, English Factory Legislation (1876), and *Hutchms and 
Harrison, A History of Factory Legislation (1903). The laws now 
in force are given in Abraham and Davies, The Factory Acts. A 
good statement of the arguments for labour laws is given in *Mrs. 
Webb, The Case for the Factory Acts. 

The subject of industrial insurance is treated fully in *Willoughby, 
Workingmen's Insurance, and the Report of the New York Bureau 
of Labour Statistics for iSqq. 



CHAPTER XXIII 

LEGAL AND NATURAL MONOPOLIES 

Importance § 246. As explained in Chapter XI. the essence of monopofy 
Monopoly ^^ such control over the supply of an economic good as enables | 
Problem the monopolist to regulate its price. In Chapter XXI. we con- ; 
sidered cases of such control exercised by trade unions and 
designed to enhance wages, or the price of labour. Much more 
common and also more menacing to general well-being are 
monopolies which consist in control over the supplies of com- 
modities. Such monopolies have it in their power in greater 
or less degree to compel the public to pay regularly and con- 
tinuously for the commodities they control higher prices than 
are needed to cover the expenses of their production, includ- 
ing a fair wages of management. This power is not unlike 
the power to tax which is exercised by the state itself. By its 
means the favoured few who control monopolistic enterprises 
derive monopoly profits at the expense of the many. The magni- 
tude of these profits, which under a system of free, all-sided 
competition would be diffused throughout the community in the 
form of cheaper commodities, is one circumstance that lends an 
interest to the monopoly problem. Another and equally im- 
portant circumstance is the manifest injustice involved in per- 
mitting a few persons to enjoy incomes from which the many 
are debarred. For these and other reasons the monopoly 
problem is one of the most important practical questions with 
which economics has to deal. In the following sections the 
principal types of monopolies that are found in the United 
States, the grounds on Vi^hich they rest, and the efforts that 
have been made to regulate and control them, are considered. 
Legal monopolies, as the simplest type, first merit attention. 
Public § 247. Legal monopolies, as already stated, may be either f 

Monopolies Public or private. Public legal monopolies embrace not merely 1 
public businesses of monopolistic character, but public services 

434 



Purposes of Such Monopolies 435 

which the state alone can render, such as the granting of 
patents, copyrights, licenses, and divorces, the registration of 
mortgages, wills, and other legal papers, the incorporation of 
companies with limited liability, etc. Tlie latter are a con- 
venient means of legal control of the relations which they affect 
and are common to all civilised countries. In the United 
States they are rendered as a rule by State, county, or municipal 
governments, with the result that the greatest diversity of 
practice with reference to them prevails in different sections. 
Usually the charges for such services are made just high 
enough to cover the expense which they entail, and in conse- 
quence they are not a source of monopoly profit. Exceptions 
to this statement are the charges for liquor licenses and for 
the incorporation of companies, which are important sources 
of public revenue. 

The direction and management of different branches of busi- Purposes 
ness have been assumed by states for a variety of reasons. In Monopolies 
Norway, moral considerations have led the Government to 
convert the liquor business into a public legal monopoly. 
The tobacco monopoly of France and the salt monopoly of 
Saxony are conducted for revenue. In Prussia the state has 
taken charge of the railway business, partly for revenue, but 
chiefly to insure reasonable and uniform rates to all shippers 
and ready control of transportation facilities in time of war or 
other public emergency. The chief public legal monopoly in the 
United States, the post-office, was undertaken with a view to 
facilitating and cheapening communication between different 
sections of the country, and these objects have always been 
made more prominent than considerations of revenue. In fact 
it may be doubted whether at the present tim.e desire for rev- 
enue would be accepted in any Western country having a 
representative government as an adequate reason for making 
a business a public legal monopoly. In the United States, 
especially, public opinion is decidedly opposed to public mo- 
nopolies managed merely for profit. The most common reason 
for advocating and defending public legal monopolies is that 
the businesses under consideration require special regulation in 
the interest of public miorals, as in the case of the liquor busi- 
ness, or that they are natural monopolies in which the public 



The 
United 
States 
(Post-office 



Private 

Legal 
Monopolies 
in Great 
Britain 



436 Legal and Natural Monopolies 

has a vital interest and that public ownership and operation 
offer the only satisfactory means of adequate control. 

The United States Post-office is a good example of a public 
legal monopoly which renders more efficient service than a 
private business organised for profit could possibly do. The 
two aspects in which its policy differs strikingly from that of 
businesses organised for private ends are that it undertakes, re- 
gardless of cost, to bring the mails within the easy reach of 
every inhabitant of the country, and that its charge for carry- 
ing mail matter is the same to all its patrons and invariable, 
irrespective of the distance within the coimtry to be traversed. 
The educational and commercial value of these departures 
from ordinary business policy could not easily be exaggerated. 
Even if it could be proved that certain services, such as carry- 
ing the mails between the large centres of population, could be 
performed more cheaply if the business were in private hands, 
the advantage would still lie, in the opinion of most thoughtful 
persons, with the public monopoly. So general, in fact, is the 
approval of the Federal Post-office in the United States that its 
success is commonly made the point of departure for argu- 
ments in favour of the public ownership and operation of a 
telegraph monopoly, a telephone monopoly, and even a railroad 
monopoly. Opponents of the latter, on their side, rarely take 
exception to the statement that the post-office has worked ad- 
mirably, but confine themselves to pointing out the respects in 
which the telegraph, telephone, and railway businesses differ 
from that of carrying the mails, and concluding that the argu- 
ment from similarity is fallacious. The arguments for and 
against the policy of making such businesses public legal mo- 
nopolies are considered in the next chapter. 

§ 248. The development of private legal monopolies presents 
one of the most interesting chapters in the history of English 
law. Reference has already been made to the prevalence of 
such monopolies in the days of Elizabeth and the first Stuarts. 
In 1602 in the case of Darcy vs. Allen, an English court de- 
clared a patent granting the exclusive right to manufacture 
playing cards for a period of twenty-one years unlawful. The 
Court held that, " All trades, as well mechanical as others, 
whicla prevent idleness (the bane of the Commonwealth) and 



Private Legal Monopolies 437 

exercise men and youth in labour for the maintenance of them- 
selves and their families, and for the increase in their substance 
to serve the Queen when occasion shall require, are profitable 
for the Commonw^ealth ; and therefore the grant to the plaintiff 
is against the common law and the benefit and the liberty of 
the subject." Notwithstanding this decision grants of mo- 
nopolies continued to be made, and this led Parliament to inter- 
vene with the comprehensive Statute of Monopolies in 1624, 
•which provided : " That all monopolies, and all commissions, 
grants, licenses, charters, letters patent, heretofore made or 
granted or benefits to be made or granted to any person or per- 
sons, bodies politic or corporate whatsoever, of or for the sole 
buying, selling, making, or using of anything within this 
realm, or the dominion of Wales, or of any other monopolies 
- . . are altogether contrary to the lav/s of this realm, and so 
are and shall be utterly void and of none effect and in no wise 
to be put in use or execution." Exceptions were made of 
patents for new industries or inventions, which might be 
granted for twenty-one years, and of patents for new processes, 
which were limited to fourteen years. The monopolies of for- 
eign trading companies were also exempted from the Act, as 
were the businesses of printing', of manufacturing saltpetre, 
gunpowder, ordnance, and shot, and of alum mining. By 
later acts all of these exceptions were removed, except those in 
favour of patents for new inventions and copyrig-hts for literary 
and artistic productions. 

When the Constitution of the United States was adopted, the In the 
doctrine which had become firmly established in England that gj."^^^g 
monopolies, in the sense of exclusive grants, are abhorrent to 
the common law, was accepted as a fundamental principle. Con- 
gress was given power* to " promote the progress of science 
and useful arts by securing, for limited times, to authors 
and inventors exclusive rights to their respective writings and 
discoveries," but it was not given power to grant monopolies 
for other purposes, and the courts have uniformly held that it 
has no such power. They have been equally unanimous in deny- 
ing any such power to State legislatures, except in connection 
with the grant for the public benefit, of special franchises to 
* Article I,, Section VIII., of the Federal Constitution. 



The 

Patent 

System 



Arguments 
for and 
against 
Patents 



438 Legal and Natural Monopolies 

public-service corporations such as street-railway, gas, and elec- 
tric-lighting companies. It follows from these decisions that 
private legal monopolies can exist in the United States only 
under the protection of the patent or copyright laws or under 
grants, in the nature of special franchises, from the State legis- 
latures, or their agents, municipal councils. 

§ 249. Under the patent law now in force in the United 
States, " any person, native or foreign, who has invented or 
discovered any new and useful art, machine, manufacture, or 
composition of matter, or any new and useful improvement 
thereof, not known or used in this country, and not patented or 
described in any publication in this or any foreign country, be- 
fore his invention or discovery thereof, and not in public use 
or on sale for more than two years prior to his application, 
unless the same is proved to have been abandoned, may upori 
payment of the fees required by law and other due proceed- 
ings had, obtain a patent therefor." The Patent Office is a 
branch of the Department of the Interior. It employs over a 
hundred trained examiners, whose business it is to study the 
specifications svibmitted and satisfy themselves that the inven- 
tion or discovery for which a patent is sought falls within the 
requirements of the law. A patent gives to the inventor the 
sole right to manufacture and sell his invention for seventeen 
years, unless it has been previously patented abroad, when the 
United States patent expires with that granted by the foreign 
country. In Great Britain the life of a patent is shorter, being 
only fourteen years, but under certain conditions it may be re- 
newed for seven or even fourteen years longer, so the prac- 
tical difference between the two countries is not great. 

Three different arguments are advanced in favour of grant- 
ing patents. The usual American argument is that they foster 
invention and discovery by insuring to the inventor adequate 
reward for his trouble. In England a common argument is 
that they induce inventors to make their discoveries public. A 
third argument which applies to the more complex inventions 
of recent years is that but for the protection which a patent 
affords, capitalists would be unwilling to risk their means in 
the development of new processes. There is doubtless reason 
in each one of these contentions and together they are usually 



Objections Answered 439 

accepted as sufficient justification for some kind of a patent 
policy. The present patent system of the United States is, 
however, criticised on several grounds : ( i ) Some people deny 
that men who have a genius for invention and discovery re- 
quire any special inducement to follow their natural bent. (2) 
Others point out that in practice those who reap the rewards 
of monopoly under our patent laws are more often business 
men and corporations, who acquire control of patents and turn 
them to commercial account, than the inventors themselves. 
(3) It is urged that important inventions and discoveries are 
the joint product of many minds and that to unduly reward the 
lucky individual who gets first to the patent office is to disre- 
gard the services of other investigators. (4) It is maintained 
that a large proportion of the patents taken out are suppressed 
by those who have vested interests to protect and that in 
consequence, instead of promoting progress, our patent law 
actually retards it. (5) The fact that the present rapid prog- 
ress in methods of production renders most processes and 
methods obsolete before they have been in use seventeen years 
is emphasised, and it is asserted that for this reason improved 
processes are usually of little value to the public when the 
patents on them expire. 

In answer to the first of these objections it may be asserted Objections 
that while genius needs, perhaps, no incentive to follow its °s"®i"® 
natural bent, talent does, and that the great majority of inven- 
tions and discoveries have been made not as strokes of genius, 
but by laborious study and experiment. Under these circum- 
stances it can hardly be granted that inventors and discoverers 
are not influenced like other people by the expectation of finan- 
cial return. To the second point it may be answered that in 
many cases making an invention commercially successful is as 
important a service as making the invention. For example, it 
would be difficult to decide in the case of the steam engine 
whether Watt or his business partner, Boulton, deserved most 
credit for the ultimate result. But for Boulton, Watt would 
almost certainly have died a broken-hearted " visionary " and 
his experiments with steam would be remembered only by 
antiquarians. Nor is it true that any large proportion of in- 
ventors fall to get some return for their inventions when the 



440 Legal and Natural Monopolies 

latter prove to be commercially successful. They are apt to 
be men who are carried away by one success and who squander 
all they receive from one invention in the vain effort to im- 
press upon the public the value of others. A patent law which 
would make all successful inventors die rich would need to 
modify human nature. The third criticism overlooks the real 
justification of a patent policy. No scheme could be devised 
that would reward inventors in proportion to their merits. All 
that can be done is to offer them a special stimulus, and this 
the present law does by giving the reward to him whose appli- 
cation for a patent is first received. 
Proposed The fourth and fifth objections point to two definite 

the Patent weaknesses in the present patent law of the United States : it 
System permits the suppression of inventions, and it grants a monopoly 

for the same rather long period of years to all inventors, irre- 
spective of the character of their inventions or the use to which 
they are put. It is easier to recognise these defects than to sug- 
gest satisfactory remedies. To cure the first, it has been proposed 
that the law require proof from the patentee that some use, 
which benefits the public, is being made of his patent within 
three or four years of the time when it is taken out, and that 
in the absence of such proof the patent be revoked. This plan 
has been tried in other countries and found to work satisfac- 
torily. Various remedies have been suggested for the second 
defect. The Government might reserve the right to buy up a 
patent at an appraised valuation, whenever this course seemed 
expedient. A decisive objection to this plan is that under our 
form of government there is little reason to think that such a 
right would ever be exercised. Another plan is to compel those 
owning patents to share them with others on payment of a fair 
rental or royalty. The difficulty here would be to determine 
what a " fair " return might be. A third plan is to impose a 
progressive tax on patents, increasing year by year, with the 
provision that failure to pay the tax would work forfeiture of 
the patent right. Finally, it has been proposed to reduce the 
term for which patents are granted, from seventeen to ten 
years and to follow England in permitting renewals for five or 
ten years in cases where the public interest seems to require it. 
The last plan has the advantage of simplicity. It also meets 



Monopoly Profits from Patents 441 

more fully than any other single change proposed the objec- 
tions urged against the present system, without itself being 
open to serious objection. 

Patents in the United States are the direct and indirect cause Patents as 
of large monopoly profits. Some of the more successful, such Monopo^v* 
as the Bell telephone patent, have earned large fortunes for Profits 
hundreds of different people and helped to build up monopolies 
which, unless controlled as regards their methods of doing 
business and rates of charge, will continue, long after the 
patents have expired, to yield large monopoly returns. More- 
over patents have become so numerous of late years, being 
now issued at the rate of 26,000 a year (1900), that they figure 
in nearly every branch of manufacturing enterprise. Nearly 
every one of the trusts organised in 1898 and 1899 controlled 
a larger or smaller number of patents and in the case of some 
of them, such as the bicycle trust, the fact that all important 
patents were owned by the combination was urged as one of 
the surest grounds for its expected success. Important as are 
patents as a source of monopoly income, however, it would be 
easy to exaggerate the extent to which they lead to the suppres- 
sion of competition. A large number of them are for the pro- 
tection of rival processes and serve to stimulate rather than to 
diminish competition between those employing the different 
methods. Only when a patented process is distinctly superior 
to all other known processes for effecting the same result does 
it give rise to an exclusive monopoly, and even such m.onopoly 
is subject, of course, to the limitations which have been already 
discussed. 

Besides granting patents, the United States Patent Office Registered 
registers labels and trade-marks on receipt of a modest fee. Jf^^^^^ ^ 
The latter have been of importance chiefly in giving a solid Marks 
basis to what is known as the " good will " of a business. A 
manufacturer who acquires a reputation because of the quality 
of his products may adopt a trade-mark to distinguish them 
from others. In the organisation of trusts, brands and trade- 
marks have been frequently recognised as among the valuable 
assets of the businesses to be absorbed. 

§ 250. The basis of copyright, " the exclusive right to ^^® . 

o y s t G m 01 

multiply for sale copies of works of literature or art," is similar Copyright 



442 Legal and Natural Monopolies 

to that of patent right, and the reasons for it are even more 
obvious. The introduction of copyright in Europe followed 
soon after the invention of printing, but the first general Eng- 
lish law on the subject was not enacted until 1710. At present 
copyright in England covers the life of the author and a period 
of seven years after his death, with the proviso that the total 
period of monopoly is not to exceed forty-two years. Copy- 
right was common in the United States before the adoption of 
the Federal Constitution. The first national copyright law was 
passed in 1790 and resembled closely the English statute of 
1710. It was amended several times and finally superseded by 
the general Act of 1870. The period for a copyright in the 
United States is twenty-eight years, but the author or his 
direct heirs have the privilege of securing a renewal for four- 
teen years more, so that the total period is forty-two years as 
in England. In comparison with the laws of other countries 
these provisions are none too liberal. In Mexico copyright is 
perpetual. In Spain it continues eighty years after an author's 
death, in France fifty years, and in Germany thirty years. 
Defects in Although the copyright law grants a monopoly for a longer 
L^'^^'^^" period than the patent law, little if any fault is found with it 
because the monopoly is of such a limited character. Even 
with this protection, authors and artists as a class are far from 
enjoying excessive incomes and those who succeed in obtain- 
ing large monopoly profits from their products serve as a 
needed incentive to the great army who find it difficult to make 
even a living from their work. Instead of being criticised for 
being too liberal in its provisions, the American copyright law 
is attacked because it does not extend the same protection 
within the United States to the works of foreign authors and 
artists which the latter enjoy at home. A discussion of this 
objection would carry us too far from the subject of monopolies 
and monopoly profits, but it certainly seems anomalous for a 
country which protects nearly all industries which require it, 
to allow its authors and artists to be subjected to the competi- 
tion of pirated editions and copies of the works of foreigners. 
The provisions of the Act of 1891, granting to foreigners on 
reciprocal terms the privilege of securing copyrights in the 
United States by having their books printed simultaneously in 



Natural Monopolies of Situation 443 

this country, remedies the evil only for the works of authors of 
estabhshed reputation. 

§251. Of all forms of monopolies those which are most Natural 
widespread in the United States are what we have styled nat- in°t he^^ ^^^ 

ural monopolies. Under this head are included monopolies of United 

St&tes 
situation, such as the anthracite-coal combination, and monop- 
olies of organisation, such as municipal gas, electric lighting, 
and street-railway companies, telegraph, telephone, express, 
and railway companies, and, in fact, all transportation indus- 
tries except those which use the free public streets or free pub- 
lic waterways and enjoy no advantage over other patrons of 
the same facilities. The importance of these businesses scarcely 
needs to be emphasised. The anthracite coal strike of 1902 
demonstrated conclusively the country's dependence upon that 
commodity. Its dependence upon monopolies of organisation is 
even more pronounced. As industry is now organised the 
services rendered by transportation companies are indispensa- 
ble to the business success of nine-tenths of the entrepreneurs 
in every community. Water, gas, or electric light, and street- 
railway transportation have become necessaries of life to 
dwellers in cities. Quite as important is steam-railroad trans- 
portation. Without it farmers and manufacturers would be 
deprived in large measure of the markets for their goods and 
compelled to turn their attention to production for the satisfac- 
tion of their own wants or to supply the restricted local 
markets that could be reached through other means of trans- 
portation. The conviction that the transportation businesses 
enumerated are not adequately regulated by competition is only 
gradually taking shape in the public consciousness. For this 
reason a good deal of attention is given in the following sec- 
tions to the explanation of the circumstances which make these 
businesses natural monopolies and therefore proper objects of 
legal regulation and control, 

§ 252. Among natural monopolies of situation are included Natural _ 
unique mineral springs, like those that have made famous of Situation 
Carlsbad in Austria and Saratoga in the United States, and a 
host of other minor monopolistic enterprises. It may be ques- 
tioned whether any out-and-out natural monopoly of situation 
that is of national importance has yet been perfected in the 



The 

Anthracite- 
coal Com- 
bination 



444 Legal and Natural Monopolies 

United States. The combination between the producers and 
carriers of anthracite coal in Pennsylvania has, however,, 
reached a point at which it presents many of the characteristics 
of monopoly, and a description of it seems not out of place in 
this connection. 

The anthracite-coal combination has been rendered possible 
by the limited area within which anthracite coal is found in the 
United States. The whole field is only 496 square miles in ex- 
tent and fully nine-tenths of the product comes from the five 
Pennsylvania counties located near the head waters of the 
Schuylkill and Lehigh rivers. Into this limited territory nine 
railroads have extended their lines and now serve, with the 
canals which they control, as the sole means of transporting 
the product from the mines to the country's centres of popula- 
tion. As long ago as 1871 the railroads, under the leadership 
of the Reading, adopted the policy of buying up coal lands with 
a view to securing an assured share of the coal traffic. It has 
taken them many years to acquire control of the industry 
and to agree among themselves as to the manner in which 
it should be conducted. First, it was necessary for them 
to enter into traffic agreements among themselves that would 
prevent independents from securing discriminating rates on the 
basis of which they might undersell the railroad coal com- 
panies. This being accomplished, the next step was to raise 
freight rates to a point that would make the coal business rela- 
tively unprofitable to independent producers and induce them 
to sell out to the railroads on moderate terms. The same rates 
"were charged railroad and independent coal companies and this 
made it difficult for the latter to prove that they were being 
treated unfairly, although it was obvious that from the point of 
view of the railroads it was immaterial that their collieries were 
making small profits so long as thej themselves were prosper- 
ing. As a result of these policies the coal holdings of the rail- 
roads were year by year extended at the same time that their 
conflicting interests were gradually, through consolidations and 
community of interests arangements, brought into greater har- 
mony. When the anthracite miners' strike of 1900 was declared 
(September 17), conditions were ripe for a few final moves in 
the game of combination. In December of that year, J. P. 



Its Present Status 445 

Morgan & Co. negotiated, for the Erie Railroad, the purchase 
of the Pennsylvania Coal Company^ one of the largest and 
most successful of the independent producers, and in this way 
defeated a project for building an independent road from the 
coal region to tide-water. In January, 1901, the Central Rail- 
road of New Jersey was purchased through the same influence 
and turned over to the Reading Railroad. The effectiveness of 
these changes in consolidating the monopoly was shown by the 
fact that the higher price for anthracite coal, which was the 
natural consequence of the strike of 1900, was continued and 
even increased in 1901 and 1902, to the profit of the railroads. 
According to a reliable estimate the railroads controlled in 
1901 some 96 per cent, of the anthracite deposits and actually 
owned over 90 per cent. The dependence of the individual 
operators who remain in the field upon the coal roads for access 
to the markets insures in ordinary times their acceptance of 
any agreements which the managers of the latter may enter 
into for the common benefit. 

At the present time, July, 1903, there is every mdication that Its Present 
the anthracite-coal combination enjoys complete control over "-^^^^^^ 
the supply of that commodity and that its price-making power 
is limited only as is that of every monopoly by the presence of 
Other commodities, such as bituminous coal, petroleum, and 
gas, which may be substituted for its product. The monopoly 
is no less real because the only bond which holds the road i 

together is a '' gentlemen's agreement " which could not be en- 
forced in a court of law. As long as the agreement is ad- 
hered to, the effect is the same as though all the roads were 
owned by a single corporation. The competition between 
anthracite coal and the substitute articles mentioned is now so 
close for several important uses that it acts as an efficient check 
on the rapacity of the combination. It did not prevent, how- 
ever, as already suggested, higher prices for anthracite coal 
during 1 90 1 and 1902 than had been known for several years, 
nor did it prevent the general prosperity of those years from 
showing itself in an increased consumption of that commodity 
in spite of the higher prices. The result was a larger margin 
of profit on a larger output for the railroads interested isi 
the combination and their stockholders. 



Need of 
Regulatbn 



Other 
Monopolies 
of Situation 



Natural 
Monopolies 
of Organ- 
isation 



The 

Business of 

Supplying 

Water 



446 Legal and Natural Monopolies 

Opinion is divided as to whether in future years the oppor- 
tunity open to consumers to substitute other articles for 
anthracite coal will serve as a sufficient check on this monopoly 
or whether legal interference will be necessary if the interests 
of the public are to be protected. There seems to be some 
ground for thinking that briquettes of bituminous coal may 
come into use in place of anthracite for ordinary domestic con- 
sumption in the near future, and that the monopoly is now near 
the height of its prosperity. Should this view prove correct, 
legal interference will be unnecessary. Without attempting to 
prophesy we may lay it down as a general principle that the 
Government has not only the right, but the duty, to regulate a 
natural monopoly like the anthracite-coal combination when 
it appears that such a business is taking advantage of its posi- 
tion to charge exorbitant prices for the commodity it controls. 

Some of the more important industrial combinations, such as 
the Standard Oil Company and the United States Steel Cor- 
poration, have undertaken to acquire control of the sources of 
supply of the raw materials they use. In neither case has this 
development gone far enough to justify the characterisation 
of these businesses as natural monopolies of situation, but that 
their managers are consciously directing them towards this 
goal seems apparent. The future alone can tell whether the 
sources of supply of such widely distributed materials as 
petroleum, iron ore, and coking coal can actually be controlled 
by single corporations. To the extent that they may be, the 
trusts referred to may become natural monopolies of situation 
instead of mere capitalistic monopolies. 

§ 253. The second class of natural monopolies embraces all 
businesses v/hose expenses of production show a steady tend- 
ency to fall as the size of the business grows. Between such 
businesses competition can have but one result, combination, 
and monopoly once established can maintain itself indefinitely 
because it can conduct its large-scale operations more cheaply, 
and therefore sell more cheaply, than an)^ small-scale compet- 
itor that may be tempted into the field. 

The transportation and delivery of v/ater to each house in a 
city is a business of this kind. It is too obvious to require dis- 
cussion that one company having one large supply pipe and 



The Business of Supplying Water 447 

smaller individual pipes for each house can supply water to a 
single street more economically than two or more competing 
companies. It is almost equally obvious that one company can 
supply the water for several adjacent streets more cheaply than 
competing companies each having a street to itself. In order 
to pump and store water economically it is necessary to do it 
on a larger scale than is open to a water company which sup- 
plies houses on a single street. As regards this part of the 
business, economical production requires that the whole of a 
city of less than 500,000 inhabitants should be supplied by one 
company and that proportionately large sections of larger cities 
should be so supplied. Under certain circumstances the tend- 
ency towards consolidation in this business in a great city may 
be checked when each of several water companies secures a 
monopoly of the business of supplying water in a particular 
section. This is practically the situation in London at the 
present time, although there are clear indications that further 
consolidation there would result in more satisfactory if not in 
cheaper service.* The disadvantages of such a division of ter- 
ritory between different companies are : ( i ) No one of them is 
in a position to carry through the enormously expensive engi- 
neering feats which come to be necessary as a city grows and 
by its growth pollutes or renders inadequate the more adjacent 
sources of water supply. (2) When some unexpected occur- 
rence cuts ofif the source of supply of one of the companies its 
customers are subjected to the inconvenience and even danger 
of a water famine. A large company can afford to maintain 
storage reservoirs to tide it over such periods. (3) The 
smaller com.panies cannot afford to have as heads of their de- 
partments as able men as the large company can afford to em- 
ploy. The situation in regard to the water business is brieflly 
then as follows : One company must have a monopoly of the 
business for each street in order to render the service with 
anything approaching economy. It will render more eco- 
nomical service if its monopoly embraces the entire city, if the 
latter be small, or a considerable section of the city, if it be 
large, and consolidation is sure to bring the business to this 
stage of development if it is allowed to grow as its nature de- 
mands. Finally, if quality and continuity as well as expense 

* Since this was written the City of London has itself efifected a 
consolidation by acquiring the property of all the water companies. 



448 Legal and Natural Monopolies 

of service are considered, it will be most satisfactory if the 
monopoly is allowed to embrace the whole of even the largest 
city and if not even the semblance of competition is maintained. 
The Gas Quite similar to the case of a water company are the cases 

trie Liffht °^ S^^ ^"^ electric-lighting companies. They also use main 
Monopolies supply pipes or wires and must control all the business in a 
large section of a city in order to be conducted most economic- 
ally. Moreover, for them the consideration in regard to the 
grade of intelligence that can be employed as the company ex- 
pands is of the utmost importance because their businesses are 
more complex. Few familiar with these businesses deny that 
they are natural monopolies in the same sense as the water busi- 
ness, or think that competition can regulate them, except that 
indirect competition which consumers themselves set up be- 
tween gas, electricity, and petroleum as means of lighting 
dwellings. When, as is frequently the case, the samie set of 
men control the municipal gas monopoly and the electric-light 
monopoly, even this competition becomes a rather unreliable 
dependence. 
The Street- §254. The street-railway business has many features in corn- 
Monopoly •^'^o'^ ^^^'^'' ^^^^ businesses just described. A street-railway com- 
pany must also have a monopoly at least of the single street on 
which its cars run, partly because of the useless duplication of 
plant that would result if a rival company were maintained, and 
partly because of the physical limitations of the street itself 
which makes even one set oi tracks a serious inconvenience to 
the public. Rival companies may be chartered to run cars on 
adjacent streets, however, and this was the usual first step in 
the history of the relations between municipalities and street- 
railway companies in the United States. For a time com- 
panies operating parallel lines may compete, but their competi- 
tion, as experience has demonstrated over and over again, al- 
ways ends in consolidation. Each company has to have its 
full equipment of tracks, feed barns or power houses, cars, etc., 
and the most expensive of these items stand as fixed and neces- 
sary charges, irrespective of the volume of business which the 
company handles. Suppose that two rival companies begin by 
halving the business for the section of the city which they 
serve. If their tracks are but a square apart a very slight ad- 



Reasons for Combination 449 

vantage in favour of either will divert to it passengers from 
the other. This consideration may lead one to lov/er its fares ; 
but this is a game at vi^hich two can play with about equal suc- 
cess and its sure consequence is loss of profits for both com- 
petitors. Realisation of this fact comes quickly and causes a 
first step towards consolidation, an agreement as to rates of 
fare.* 

But there are other ways in which passengers may be at- Reasons 
tracted from a rival line. If the companies start as horse-car binatiou 
lines, as did the street-railway companies of all the older 
cities of the United States, superior management will show 
itself in quicker service. Every passenger drawn to the better 
line will add nearly his entire fare to its profit account — since 
the fixed charges are relatively so large and the running ex- 
penses, which alone increase with the number of passengers 
carried, relatively so small — and will, for the same reason, de- 
duct nearly his entire fare from the profit account of the rival 
company. The successful competitor has thus a larger and 
larger profit fund with which to improve still further the 
quality of its service, while the other company is forced by fall- 
ing profits to enter upon a policy of retrenchment and economy 
which will drive away still more of its customers. The in- 
ferior company may struggle on and pay small dividends as 
long as both lines use the same sort of power, but the introduc- 
tion of the cable or trolley system by the superior line is likely 
to draw away so many of the passengers of the other that it is 
driven into bankruptcy — or consolidation with its rival. This 
in brief is the story of the street-railway business in the cities 
of the United States. Its chapters have become so familiar to 
street-railway managers that they now usually take a short cut 
to consolidation as soon as a rival company is chartered to run 
on streets parallel to their own lines. Only in case the organ- 
isers of the new company demand too high terms is the experi- 
ment of competition actually tried and the question decided, as 

* In Philadelphia a Board of Presidents of City Railways was formed 
as early as May 24, 1859, barely two years after the first line was 
built, and such a board continued to fix rates of fare for the whole city 
until all the important lines were merged in the Union Traction Com- 
pany in i8g5. During all that time there was only once, and then only 
for a brief interval, any competition in regard to rates of fare. 



Advan- 
tages of 
<Jombina- 
tion 



The 

Telephone 

Monopoly 



450 Legal and Natural Monopolies 

in the mediaeval trial by combat, which contestant is to absorb 
the life of the other. 

The advantages of consolidation in the street-railway busi- 
ness are similar to those enumerated in connection with other 
natural monopolies, (i) The fixed plant may be more fully 
and more economically utilised. Thus, cars may be run only 
over the streets that are most conveniently situated for traffic, 
power stations may be placed more advantageously, and the 
rolling stock may be better adapted to the tastes of different 
classes of patrons, new cars being used on fashionable streets 
and old equipment worn out where it will excite least criticism, 
(2) Superior ability may be employed in each department and 
specialisation may be carried further. (3) Improved appliances 
may be experimented with and introduced more readily than by 
smaller competing companies with proportionately less capital. 
For the street railway, then, as well as for the businesses 
of supplying water, gas, or electricity, the conclusion seems to 
be justified by theory and confirmed by experience that mo- 
nopoly is the natural, inevitable and economically desirable 
form of organisation. 

§ 255. The next most important municipal monopoly, the 
telephone business, owes its form of organisation to somewhat 
different circumstances. Unlike the business just described 
it is not subject to the law of decreasing expense. On the 
contrary electrical engineers maintain, and with apparent rea- 
son, that the larger the number of subscribers served through 
one exchange the larger is the expense per subscriber of ren- 
dering the service. This is because the exchange stations must 
be so arranged that each new subscriber — or pair or quartette 
of subscribers where two or four party lines are used — may 
have his wire connected readily by each of the many operators 
required in a large office with that of any other subscriber. 
If one operator is able to attend to the calls of fifty sub- 
scribers and the office serves one thousand, this necessitates 
twenty different terminals at the exchange for each wire. If 
the number of subscribers doubles, each separate wire must be 
let in at forty points. If five thousand subscribers are to be 
served, each wire must have one hundred distinct terminals. 
In this way the expense at the central office increases by multi- 



Advantages of Monopoly 451 

plication rather than by addition. For five thousand sub- 
scribers not five times, bnt twenty-five times as many connec- 
tions are needed as for one thousand. Nor is there the saving 
of expense outside the central office in the telephone business 
that is to be found, for example, in connection with electric- 
lighting. For the best service it is necessary to have a dis- 
tinct wire for each new subscriber. Fair service can be given 
to two parties on the same line. Four-party lines are less satis- 
factory. Lines serving more than four have been found to 
work so badly that they are now little used in cities. Thus as 
regards outside wiring the expense grows uniformly vi^ith the 
number of subscribers. There are, of course, on the other 
hand, economies in administration, etc., which result from an 
increase in the number of subscribers and which must be taken 
into account. On the whole it appears to be true, however, 
that increasing rather than diminishing expense is the law of 
growth in the telephone business. 

Monopoly results in this business from the fact that the 
larger the company the more valuable is the service that it can 
render. Each new subscriber means another person or firm 
with whom other subscribers may talk. No one would care 
very much for a telephone if it enabled him to talk to only fifty 
people. It is ten times as valuable when it enables him to talk 
to five hundred. If it enables him to talk at will with five 
thousand and he is a man of affairs with business relations with 
many of them, it becomes well-nigh indispensable. 

In the case of the telephone business in the United States Advan- 
monopoly organisation was the original form because of the j^onoj^ojy 
patent. Since the patent expired the monopoly continues be- 
cause few persons care to leave old companies with their large 
numbers of subscribers to throw in their fortunes with new 
companies with small numbers. New companies do start up, 
of course, and their promoters, and others who hope that com- 
petition may lower rates, become subscribers. If the old com- 
pany feels itself threatened, it takes up the gauntlet and enters 
upon a war of rates which soon brings the weaker concern to 
terms. The consolidation which follows is not only good as a 
business measure for those directly interested, but it is in 
harmonv with the best interests of the whole community. 



ilethods of 
Increasing 
Telephone 
Rates 



Monopoly 

Profits of 

IMimicipal 

Monopolies 

in the 

United 

States 



452 Legal and Natural Monopolies 

One company able to connect any subscriber with all the other 
persons who use telephones is greatly to be prefered to com- 
peting- companies, which at best render but a partial service. 
The higher rates which follow consolidation are not socially 
beneficial, but the remedy for high rates in the telephone busi- 
ness, as in connection with other natural monopolies, is not 
competition, but legal regulation. 

A study of the evolution of the methods of charging for tele- 
phone service throws an interesting light on the means by 
which the companies increase their charges as the number of 
their subscribers grows. It shows in the first place that the 
rates per message are higher the larger the size of the city in 
which the telephone is installed. For example, in the pub- 
lished rates for the winter 1901 to 1902 the business rate for 
1500 messages per annum on a one-party line was $126 in the 
Borough of Manhattan, New York City, $105 in Boston, and 
$87 in Washington. The differences are thus sufficient to 
make up for a considerable increase in the expense of render- 
ing the service in the larger places. Nor is this the only con- 
trast. In the larger places each subscriber is apt to use his 
telephone more than in the sm-aller. By changing from the 
original plan of charging a lump sum for unlimited service to 
the plan now almost universal of charging for each message, 
the companies have increased the actual returns on each in- 
strument in the larger places very considerably. To the sub- 
scriber the system of charging for each message seems fair and 
reasonable. To the company it is highly advantageous because 
it causes its receipts to grow in increasing proportion as the 
size of the exchange grows, although no change appears to 
have been made in the rates. In these ways the telephone 
monopoly adjusts its charges to the value of the service it ren- 
ders and is fully compensated for any increase in the relative 
expense of supplying telephone facilities to an increasing num- 
ber of patrons. 

§256. For the reasons explained in Section 114, Chapter 
XL, it is v>rell-nigh impossible to ascertain the relation which 
the earnings of a business organised as a corporation bear to 
the capital actually invested in it. This is particularly true in 
the case of municipal monopolies in the United States, as they 



Monopoly Profits of Street Railways 453 

have had every inducement and facihty to conceal their profits 
by means of overcapitalisation. At least two investigations have, 
however, been made which throw some light on the profitable- 
ness of street-railway enterprises. 

According to Professor Spiers,* who made a careful study 
of the street railways of Philadelphia, the terms on which the 
Union Traction Company, organised in 1895, acquired control 
of all of the street railways in that city involved the payment 
by it of 5 per cent, interest on the capital actually invested in 
these lines, which he puts at $35,000,000, and in addition on 
$75,000,000 which represents the value of the franchise or of 
the monopoly v/hich the subsidiary companies enjoyed. In 
other words the lease calls for payments aggregating nearly 16 
per cent, on the capital originally invested. If instead of capital 
invested, the expense of reproducing the plants were taken 
as the criterion of the proper capitalisation, the showing would 
be even more favourable from the point of view of monopoly 
profit. Since Professor Spiers made his inquiry the Union 
Traction Company has itself been leased by a new company, 
organised in 1902, on terms which insure a fair monopoly 
profit to its own stockholders over and above that promised ta 
the subsidiary companies. An even more thorough-going in- 
quiry than that made by Professor Spiers in Philadelphia was 
made a few years later by a committee of the Civic Federation 
in Chicago. According to the Report f published in 1901, it 
was found that nearly $75,000,000 of the total valuation of 
$120,000,000 put upon the street railways of Chicago in July 
of that year, represented the value of franchises, or of the mo- 
nopoly. The net earnings of the companies during the pre- 
ceding year were found to equal 14.6 per cent, on the original 
cost of the plants, rolling stock, etc., of the companies, and 
20 per cent, on the cost of reproducing these plants and equip- 
ment. If the results shown by these two investigations may 
be accepted as fairly typical of the profitableness of street rail- 
way monopolies generally, and there is no reason known to the 
author for supposing that conditions in Philadelphia and 

*The Street Railway Systetn of Philadelphia, p. 45. 
\The Street Railways of Chicago, Reprinted from Municipal 
Affairs, 1901. 



Stich 
Profits 
Now 
Capitalised 



The 

Solution 
of the 

Municipal 
Monopoly 
Problem 



454 Legal and Natural Monopolies 

Chicago have been peculiarly favourable to these businesses^ 
the monopoly profit in the United States from this one kind of 
municipal enterprise must aggregate many millions each year. 
According to a report of the Census Bureau 799 of the 817 
operating street and electric railways which did business in the 
United States during the year ending June 30, 1902, showed 
gross earnings equal to nearly $250,000,000 and net earnings of 
over $105,000,000. If the latter bore the same relation to the 
original cost of plant and equipment as was shown for Phila- 
delphia and Chicago (that is, 14.6 to 16 per cent.), from one- 
third to one-half of the amount ought to be credited to 
monopoly profit. 

Quite as profitable as the street-railway business have been 
the other municipal enterprises described as natural monopo- 
lies. If the monopoly profits from all of these businesses in the 
United States could be added together, it would, doubtless, be 
found that they amount each year to hundreds of millions of 
dollars. When the magnitude of these profits and the ease with 
which they may be capitalised are considered, the many large 
private fortunes which have been gained by bribing State legis- 
latures and municipal councils to dispose of franchises for 
municipal monopolies for a mere fraction of their value need 
excite no surprise. Unfortunately, the stocks and bonds of 
these corporations have changed hands so frequently since they 
were originally issued that the men who have reaped the largest 
returns from them will not be affected by the tardy measures 
that may now be taken to secure a larger share of the benefit 
from these improvements for the whole people, 

§ 257. The usual first impulse of the student of the munici- 
pal monopoly problem is to advocate municipal ownership and 
operation as a remedy, and there is much to be urged in favour 
of this policy. Monopolies by their very nature, concerned 
with services in which the whole people have a vital interest, 
and limited in the scope of their operations to the particular 
towns or cities which they serve, these businesses, if any, it 
would appear, should be undertaken by municipal govern- 
ments as branches of the public administration. Yet the objec- 
tions to such a policy for the cities of the United States are very 
strong. The arguments on either side must be weighed in con- 



Arguments Concerning Public Ownership 455 

nection with the local conditions affecting the problem. Only in 
this way can a wise decision be arrived at. 

The advocates of public ownership claim the following advan- Arguments 
tages for that policy : ( i ) The quality of the service rendered o waersWp 
by a branch of the public administration is likely to be superior 
to that resulting from private enterprise, (2) The desire for 
profit being removed, the charges under public ownership 
will be adjusted to the expense of rendering the service. 
From this it is argued that charges will be low and the 
widest use of these essentials to civilised existence will be 
encouraged. (3) The corrupting influence of unscrupulous 
corporations anxious to retain or to have extended their 
franchise privileges will be removed from city politics. 
(4) Enlarging the scope of municipal activities will enlist 
in the service of the city more and better oflEicials. At the same 
time it will increase intelligent interest in public affairs and tend 
to elevate the tone of political life. This argument assumes, of 
course, that the new departments of the municipal government 
will be subjected to adequate civil service regulations, (5) 
Experience, it is claimed, has shown that nothing short of public 
ownership and operation of these businesses can secure the 
degree of control necessary to the safeguarding of the public 
interests. 

In support of private ownership and operation the following Against 
considerations are urged in rebuttal: (i) There is no ground o^nershiu 
for assuming that the service rendered by the municipal govern- 
ment will be better than that rendered by private enterprise. 
On the contrary, if experience is to be relied upon, municipal 
governments will inflict on the public water, gas, etc., of quali- 
ties that would not be tolerated from private companies organ- 
ised for profit. In this connection the improvement in the qual- 
ity of the gas that resulted from the lease of the Philadelphia 
gas plant to a private company in 1898 is cited. (2) The inef- 
ficiency characteristic of municipal activity is certain to show 
itself in high expenses of operation. These higher expenses 
may necessitate higher charges than are required under private 
management to afford even a liberal monopoly profit. (3) At 
the present stage of political development, public ownership 
and operation would mean simply more spoils for politicians. 



45^ Legal and Natural Monopolies 

in its practical effects it would be even more demoralising, 
politically, than the corrupt influence of private corporations 
complained of. (4) Private ownership is more progressive 
than public management. In this connection the backward con- 
dition of the municipal street railways in Great Britain is cited. 
Though temporary advantages might result from public owner- 
ship, it is argued that this policy would sacrifice the public inter- 
est in the long run by checking improvements. (5) It is denied 
that adequate legal regulation and control of private companies 
may not be secured when the community is really alive to its 
own interests. Given care in the drafting of franchises and 
insistence that these shall lapse after a limited time, more satis- 
factory results may be realised, it is claimed, under private than 
under public ownership. 
Other Con- These arguments, it will be seen, are partly contradictory and 
partly related to unconnected phases of the problem ; their mere 
statement emphasises the necessity of studying local conditions 
before declaring for either public or private ownership. In 
general, it is probably true that the quality of the service can be 
more easily controlled under public than under private manage- 
ment. Where quality of service is all-important, as in the case 
of the water supply, this furnishes an argument for the former 
which is not found, for example, in connection with the tele- 
phone business. On the other hand, where the methods of oper- 
ation are in process of rapid improvement, as in the case of the 
telephone business, the superior progressiveness of private 
management is an argument on that side that is not found in 
connection with the business of supplying water. More striking 
even than differences between the different businesses are the 
differences between the political preparedness of different local- 
ities for public ownership. In certain Massachusetts towns, 
where public interest is highly developed, these services may be 
and have been undertaken with success. In other towns of the 
same size in other sections in which civic self-consciousness is 
just beginning to manifest itself, attempts to perform them 
through the town governments have frequently resulted in 
failure. 

In the United States, up to the present time, there has been a 
marked tendency to rely upon private initiative and private 



The Regulation of Municipal Monopolies 457 

enterprise for the performance of these services, as of other Situation 
services of an industrial character. The only important united 
exception has been in connection with the business of supplying States 
water to dwellers in towns and cities, and this has been under- 
taken by municipal governments less because of any distrust 
of private enterprise in this field than because good water has 
been demanded by public opinion even before the business of 
supplying it gave promise of proving financially successful. 
Municipal water plants have thus been comparable with the 
public schools in that they have served to supply to citizens 
often at less than cost an indispensable condition of civilised 
life. 

Abroad, and especially in Germany, the preference is for In Euroi^e 
the public ownership and operation of businesses of this type. 
If the conditions in any two countries were sufficiently simi- 
lar to admit of comparison, something might be learned by 
a study of the results of the different systems in different lands, 
but, unfortunately, conditions are quite unlike, and it appears 
to be the rule that those who apply the comparative method 
to this problem prove, at least to their own satisfaction, just 
about what they hoped to establish when they began their 
inquiry. 

If, after carefully weighing the advantages and disadvantages Methods of 
of municipal ownership and operation, a community decides MunTcfpS^ 
against its adoption, the alternative is by no means the unregu- Monopolies 
lated private ownership and operation encountered in most 
American cities. For these monopolies, as for most other mo- 
nopolies, public regulation and control are indispensable to the 
protection of the public interest. To determine how this con- 
trol shall be exercised is a problem for students of politics 
rather than economics, but the following general principles may 
be suggested : ( i ) Such businesses are natural monopolies, and 
nothing is to be gained by attempting to subject them to the 
control of competition. Exclusive franchises should be granted 
to the companies entrusted with them. (2) These franchises 
should be limited to a definite term of years. The term must 
be long enough to encourage that investment of capital that is 
indispensable to efficient service, but not so long as to commit 
the municipality to high charges when changed conditions may 



Obstacles 

to 

Regulation 

in the 

United 

States 



458 Legal and Natural Monopolies 

make lower charges profitable. When the term expires the 
franchise should revert to the municipality and it should have 
the privilege of acquiring for itself or for a new com.pany, at a 
fair valuation, the plant and equipment of the old company, in 
case its charter is not extended. (3) The specifications in the 
charter should be carefully drawn by experts so as to insure 
at least at the outset, the best quality of service at reasonable 
rates. Charters should be granted like other Government con- 
tracts, to the responsible bidder offering the most favourable 
terms, and every effort should be m.ade to advertise widely the 
provisions of the charter, and to prevent collusion between 
those who make bids. Space will not permit detailed discussion 
or defence of these principles. Although stated dogmatically, 
it is believed that they represent the consensus of opinion 
among students of public-service corporations who recognise 
them as monopolies and yet hesitate to advocate for them mu- 
nicipal ownership. 

It is one thing to lay down general principles and quite 
another to carry them out in practice. Only of late years has 
public opinion in the United States been sufficiently enlightened 
on the subject of municipal monopolies to demand any sort of 
adequate control and regulation, and in the meantime all sorts 
of abuses have been permitted. Perpetual charters have, in 
many cases, been granted on terms which permit the companies 
operating under them to disregard completely the interests of 
the public. Worse than all, public-service corporations have 
come to exert an influence on political parties, through 
contributions to campaign funds, and on public officials, 
through powerful and unscrupulous lobbies, which opposes 
a serious obstacle to efforts to control them through polit- 
ical means. Neglect of the question has brought about 
a state of affairs in which each community is confronted 
by a special problem, modified by local conditions, and must 
proceed as best it may to gain the mastery over the cor- 
porations which it has so carelessly created and allowed to 
grow to overweening power and influence. In dealing with 
such corporations vested interests must be respected, but it must 
not be forgotten that the true interest of the whole community 
is more important than that of a particular class in the commu-- 



Obstacles to Regulation 459 

Tiity, and that every great reform of necessity inflicts hardship 
upon some individuals. It is the duty of the Government to 
indemnify those who are injured by changes which are delib- 
erately undertaken with a view to the general welfare, but it is 
€ven more its duty to make such changes. The reform and the 
desirability of the reform should be the predominant considera- 
tion, the indemnification an incidental accompaniment neither 
to be exaggerated nor lost sight of. Only thus can progress 
towards a better economic and political organisation of society 
he realised. 

REFERENCES FOR COLLATERAL READING 

^ Le Rossz'g-no^, Monopolies Past and Present (bibliography); Bemis, 
Municipal Monopolies; ^Darwin, Municipal Trade: The Advan- 
tages and Disadvantages; Spiers, The Street Railway System of 
Philadelphia; Report on the Street Railways of Chicago (Municipal 

. Affairs, igoi); *Ely, Problems of To-day, Chaps. XVII-XXI. 



CHAPTER XXIV 



THE RAILROAD PROBLEM IN THE UNITED STATES 



National 
Monopolies 
of Organ- 
isation 



Circum- 
stances 

Making the 
Railroad 
Business 
Monopo- 
listic 



§ 258. In addition to the municipal monopolies discussed m 
the last chapter there are businesses, national in their scope, 
which should also be classed as natural monopolies of organi- 
sation. The principal are the telegraph, the long-distance tele- 
phone, the express, and the steam-railway business. For them, 
as for municipal monopolies, the fixed charges are a chief item 
of expense. Thus a telegraph or long-distance telephone com- 
pany, whether large or small, must maintain offices in and 
connecting wires between the principal centres of population or 
it will have few patrons. In comparison with the cost of this 
necessary equipment the expense of receiving and sending mes- 
sages is small. It follows that one company utilising fully its 
permanent plant can conduct all of the business more econom- 
ically than can two or more companies needlessly duplicating' 
plants. In the express business the situation is similar as 
regards terminal offices, although the tendency towards combi- 
nation and monopoly is less marked than in the telegraph 
business, because the actual transportation of goods is effected 
by railways acting as agents. These circumstances make 
monopoly the economical form of organisation for each one of 
these businesses. That no one of them has yet become an open 
monopoly in the United States is no disproof of this assertion. 
Public hostihty to monopoly is so familiar and finds such 
frequent expression in the decisions of the courts, that business 
managers are careful to maintain the forms of competition 
even after the substance has departed. 

§ 259. The railway business exhibits on a larger scale similar 
conditions to those found in the telegraph business. Roadbed 
and terminal facilities represent heavy fixed charges that must 
be nflit, no matter how small the volume of business. The more 
fully these can be utilised in carrying on a dense traffic the 



Concentration in the Railroad Business 461 

smaller will be the expense for each unit of traffic. It follows 
that competition for business between long-distance railways 
partakes of the same life-and-death character that was described 
in connection with street railways. When one road gains an 
advantage and begins to swell its profits by drawing from the 
profits of the other company, the situation of the latter is very 
scon rendered desperate. It has to choose between combination 
with the other road on its own terms and bankruptcy, and either 
choice, as American experience has shown over and over again, 
means in the end combination and monopoly, "A railroad is 
thus," to quote from one of the Reports of the Interstate Com- 
merce Commission, " essentially a monopoly. This is literally 
true as to all local points upon its line which are reached by it 
alone." And it is virtually true, as the report adds by implica- 
tion, even of " competitive points," since the rates at such points 
are now fixed quite generally by agreements between the nom- 
inal competitors. 

The progress towards concentration of railway control in the Progress 
United States has been marked by three distinct stages. In the ccmcentra- 
earlier period the railways were looked upon as beneficent tion in the 
agencies deserving of generous public support and of all con- Business 
lidence. Consolidations were regarded with indifiference, if not i" V^^ 
with favour, and the business was permitted to develop in the states 
direction of monopoly as rapidly as its nature dictated. About 
1870 it began to be appreciated that the power of the railways 
for evil was quite as great as their power for good. The cry of 
extortionate rates and monopoly was raised, especially in the 
agricultural States of the middle West, and an era of drastic 
restrictive legislation was inaugurated. For fifteen years the 
States tried to deal with the railway problem through State 
laws and State railway commissions armed with sweeping pow- 
ers. The chief result of their efforts was to educate public 
opinion as to the real nature of the railway business and to 
prepare the way for Federal interference. Incidentally, they 
forced some of the roads into bankruptcy, and compelled all of 
them to substitute secret for open methods for securing the 
centralisation of control that continued to be desirable. In this 
second stage secret agreements in regard to rates were at first 
substituted for competition. The ease with which such agree- 



462 The Railroad Problem in United States 

ments might be violated suggested that to them be added defi- 
nite understandings in reference to the division of the traffic 
between nominally competing roads. The entire business was 
" pooled " and then divided up in a certain fixed proportion 
between the companies entering into the pool. As one provi- 
sion of these pooling agreements guaranteed to each road its 
proportion of the revenue from the joint traffic, whether it car- 
ried its exact proportion of the freight and passengers or not, 
the inducement to rate-cutting on the part of individual roads 
was removed, and the stability of rate agreements was propor- 
tionately strengthened. Such " pools " became very common 
after 1880 and served to create combinations and monopolies 
on behalf of the roads entering into them as effective, while 
they lasted, as though the roads were under one management. 
In consequence, they became special objects of attack on the 
part of those who still believed in competition as a remedy for 
excessive railway rates. Wlien the Interstate Commerce Act 
was passed, in 1887, one of its clauses expressly forbade " pool- 
ing." The Federal Anti-Trust Act of 1890, as interpreted by 
the United States Supreme Court, went even further, and pro- 
hibited all agreements in regard to rates. The result of these 
two measures has been to compel railroad managers during the 
third period of railroad development to effect out-and-out com- 
binations of competing lines as a means to securing centralised 
control. This has been accomplished either through the pur- 
chase by one road of a controlling interest in the stocks of its 
competitors or by the creation of a new corporation to acquire 
controlling interests in the stocks of two or more rival compa- 
nies, or through so-called " community of interests " arrange- 
ments, based on the acquisition by one company of enough stock 
in another to secure representation on its board of directors. 
In one or another of these different ways centralisation of con- 
trol has been extended to embrace an ever larger and larger 
proportion of the railway mileage of the United States. 
This is indicated for the last decade by the fact that 
from 1890 to 1900 the proportion of the total railway 
mileage of the country operated by companies controlling 
TOGO miles of line and upwards increased from 47.5 per 
cent, to 60.8 per cent. Since 1900 progress in this direc- 



Discrimination between Commodities 463 

tion has been at an accelerated rate. In the year 1901 alone 
three great combinations were consummated : the Pennsyl- ' 

vania Railroad acquired a large interest in the Baltimore and 
Ohio, the Union Pacific acquired control of the Southern 
Pacific, and the Northern Securities Company combined the 
Great Northern and the Northern Pacific just after the latter 
had acquired the Chicago, Burlington, and Quincy. The last 
of these consolidations may be declared illegal by the Supreme 
Court, as it has been by a lower tribunal, but it is the cur- 
rent opinion among railroad men that the unified control 
which it was intended to perfect will be continued. The move- 
ment towards consolidation has already gone so far that it is 
considered a safe prediction in railroad circles that before the 
end of the present decade the important railway mileage of the 
United States will have come under the control of four or five 
giant companies. Whatever may be the fate of this prophecy, 
it may be asserted with confidence that competition in regard 
to rates has already given way on all the more important rail- 
road systems to open or secret traffic agreements. This does 
not mean necessarily that rates are higher than formerly, al- 
though the Interstate Commerce Commission secured a good 
deal of evidence indicating that they were raised by joint action 
on the part of the railroads of the country from January i, 
1900, to January i, 1902. The railroad is still restrained in its 
rate-making by all of the considerations enumerated in the sec- 
tion discussing the limitations on monopoly, and happily the 
railroad business is of such a nature that low rates and a large 
volume of traffic are usually much more profitable than high 
rates and a smaller amount of business. It does mean, however, 
that the time has passed when competition between railroads 
can longer be relied upon to control the policies of railway 
managers. 

§ 260. The first attacks upon the railroads, in the Granger Discrimi- 
legislation of the decade from 1870 to 1880, were based on the Railway 
charge that their rates were extortionate, but it is now gener- Rates: Be- 
ally recognised that an even more serious evil in connection modities 
with them is discrimination. This may be of three kinds : First, 
freight classifications may be made in such a way that particu- 
lar commodities are discriminated against. For example, it has 



464 The Railroad Problem in United States 

recently been charged against the railroads carrying wheat from 
the middle West to the sea-board that they make rates on wheat 
so low in comparison with their rates on flour that the millers 
of Minneapolis and Duluth can no longer produce for export 
The determination of the rates that shall be charged on differ- 
ent commodities presents one of the most difficult problems in 
the whole range of railroad practice. In general, the policy of 
railroad managers is so to classify articles that each will pay 
as high a rate as " the traffic will bear." The more valuable the 
commodity, in proportion to its bulk, the higher, ordinarily, the 
rate it can afford to pay. On this ground the highest rates 
apply usually to costly finished commodities, and the lowest 
to staple materials. It is obvious that within the limits of 
this general plan there is wide range for variation, and that 
the railroad manager who wishes to favour the development of 
one industry at the expense of another, or of one locality at the 
expense of a rival, or of one firm in opposition to its competi- 
tors, may do so in many cases by merely changing the classifica- 
tion of the articles to be affected. 
Between More serious, because more far-reaching in its consequences, 

is the second form of discrimination — that between places. 
Under present conditions no community lives to itself alone. 
Most communities produce chiefly for export to other localities 
and rely on other localities for most of the commodities needed 
to satisfy home wants. As a rule, the railroad is the agency 
through which the exportation of surplus products and the 
importation of needed products in exchange is effected. It 
has still at certain points competitors in the public highways and 
in canals and water routes, but for ninety out of every hundred 
communities the services of the railroad are indispensable to 
industrial prosperity, if not to industrial existence. Under 
these circumstances the power of railroads to stimulate or 
retard the prosperity of centres of population can hardly be 
exaggerated. By granting low rates they can transform even 
unpromising sections into busy seats of agriculture, manufac- 
turing, or even mining. High rates may have an equally dead- 
ening effect upon sections that were previously prosperous. 

In general, the interest of the railroad is served by encourag- 
ing the growth of centres of population where the natural coo- 



Discrimination between Persons 465 

ditions are most favourable, but it often happens that special 
reasons lead to quite a different policy. One such reason is the 
necessity of sharing traffic with other transporting agencies at 
competitive points. If high rates are asked at such points, the 
temptation to break traffic agreements in order to obtain a 
larger share of the business is too strong to be resisted. Hence 
low rates usually prevail where two or more roads serve the 
same community, and railroad managers are only too apt to 
charge high rates at intermediate points. Local rates were so 
high when the Interstate Commerce Act was passed in 1887 that 
a special clause, known as the " long and short haul provision," 
was inserted to protect local shippers. This provides that the 
rates between intermediate points on the same road must not 
exceed rates between terminal points. Another reason for dis- 
crimination between places is the special interest which the rail- 
road or its managers may have in the development of particular 
localities. It has not infrequently happened that railroad man- 
agers who have acquired large tracts of land in particular sec- 
tions have deliberately lowered freight rates for such sections 
in order to attract settlers to them and in this way enhance 
the value of their holdings. The demoralising consequences of 
Such unjust practices have been experienced too frequently in 
all parts of the United States to require emphasis. 

§ 261. The third and worst form of rate discrimination is Betweea 
that between persons. The motive for such discrimination is 
inherent in the nature of the railway business. Unlike the 
farmer or the manufacturer, the railroad manager cannot calcu- 
late what it costs him to carry additional freight or additional 
passengers. His fixed charges must be met in any case. 
The additional expense connected with additional traffic is so 
small that almost any rate for the particular traffic will prove 
profitable so long as the open rate for other traffic is maintained. 
"' Generally speaking," to quote again the language of the 
Interstate Commerce Commission, " he feels that he must have 
the traffic. His road is there, and it can be used for nothing else„ 
The property with which he stands charged may be seriously 
injured without that particular traffic, and he must get it when 
it is moving. He cannot lie idle for better prices or more pros- 
perous conditions. There is, therefore, a constant temptation 



Reasons 
for 

Discrimi- 
nations 



466 The Railroad Problem in United States 

to obtain it at any cost. Now, the rates between two competi-^ 
tive points have been published. The manager of one road finds 
that business has abandoned his Hne, and he believes that it is 
moving by a rival route. He can draw but one inference, and 
that is, that his competitor has secretly reduced the rate. Under 
these circumstances what shall he do? Shall he maintain the 
published rate and thereby abandon business ? But that means 
disaster to his road, the loss of his reputation as a manag'er, and 
ultimately of his employment. V/hat most managers actually 
do is to get the business by making whatever rate is neces- 
sary."* 

It may be said that railroad managers have no more reason 
to deal unequally with different customers than managers of 
other businesses ; but this is, unfortunately, not the case. A 
situation which frequently confronts a manager was described 
by Mr. C. M. Wicker of Chicago, in testimony given before an 
investigating committee of the Illinois legislature. He said : 
" Here is quite a grain point in Iowa, where there are five or 
six elevators. As a railroad man I would try and hold all 
these dealers on a level keel, and give them all the same 
traffic rate. But suppose there was a road five or six miles 
across the country and all these dealers should begin to drop 
in on me every day or two and tell me that the road across the 
country was reaching within a mile or two of our station and 
drawing to itself all the grain. You might say that it would 
be the right and just thing to do to give all the five or six 
dealers at the station a special rate to meet that competition 
through the countr}'. But, as a railroad man, I can accomplish 
the purpose better by picking out one good, smart, live man, 
and, giving him a concession of three or four cents a busliel, 
let him go there and scoop the business. I would get the ton- 
nage, and that is what I want, but if I give it to five it is 
known in a very short time." For such reasons railroad man- 
agers usually prefer to deal with one rather than with a 
number of shippers. The discriminating rate must be kept 
secret or other shippers will be dissatisfied, and secrecy is only 
possible where knowledge of the transaction is confined to the 
manager and the favoured shipper. Nor are shippers them- 
* Twelfth Annual Report (1898), p. 18. 



The South Improvement Company 467 

selves entirely passive in connection with discriminations. 
Business managers controlling large amounts of traffic at com- 
petitive points are well versed in the process of playing one 
road off against another. It is even alleged that in some cases 
men have withdrawn their entire business from one road in 
order to convince its traffic agent that they were getting dis- 
criminating rates from another, and in this way persuade him 
to grant even lower rates, when, as a matter of fact, no dis- 
crimination had existed. 

The reports of the investigating committees and commis- Case of 
sions which have inquired into the practices of railroads in the jinprJve? 
United States are full of evidence as to the extent to which ment 
discriminations have been practised. Some of the most ^'^P^^y 
flagrant cases have been brought to light in connection with 
investigations of the trusts. In one case the South Im- 
provement Company, which was organised by the original pro- 
moters of the Standard Oil Company, entered into a formal 
contract with a railroad under which the latter was to charge 
it ten cents a barrel for transporting its oil, and other com- 
panies thirty-five cents a barrel for the same service, with the 
proviso that twenty-five cents of this excessive charge should 
be paid to the South Improvement Company itself. That 
such an arrangement would be fatal to competitors who were 
compelled to ship over a railroad promising such discrimina- 
tion is obvious. There is abundant evidence that similar, if less 
favourable, traffic arrangements had much to do with the early 
success of the Standard Oil Company in crushing its com- 
petitors or compelling them to sell out to it on terms favourable 
to itself. In the judgment of the Interstate Commerce Com- 
mission, expressed as recently as 1898, " there is probably no 
one thing to-day which does so much to force out the small 
operator and to build up those monopolies against which law 
and public opinion alike beat in vain, as discrimination in 

freight rates." ,, , 

° Monopoly 

§ 262. That the businesses classified as national monopolies Profits 

of organisation have given rise and do give rise to very large ^°™ ^^^ 

monopoly profits is well understood, but the reasons already Business 

explained make the exact measurement of these profits out of ^nked 

the question. They are peculiarly sensitive to public opinion states 



468 The Railroad Problem in United States 

and have been careful to so adjust their nominal capitalisations 
to their earning powers that the interest and dividends that 
they pay to investors seem, when the risks connected with such 
enterprises are considered, scarcely a fair and certainly not an 
excessive return. Thus the aggregate capitalisation of the 
railroads of the United States was returned to the Interstate 
Commerce Commission on June 30, I9cx>, at $11,490,000,000 
divided about equally between bonds and stock. During the 
preceding year interest was paid on 95 per cent, of the bonds^ 
but on only 46 per cent, of the stock, and the average return 
on bonds and stock together was only 3.4 per cent. On only 
3 per cent, of the stock were dividends in excess of 8 per cent, 
paid, while on 72 per cent, of the outstanding bonds the rate of 
interest was under 6 per cent. Equally modest returns are 
shown for most of the telegraph, long-distance telephone, and 
express businesses of the country. To get behind figures like 
the above to a knowledge of the relation which earnings bear 
to actual investment in these enterprises is a task that has only 
been undertaken in a few instances. It is undoubtedly true 
that in many cases these monopolistic businesses have proved 
unprofitable. For them as for other monopolies, monopoly 
profit is a possibility rather than a necessity. No matter how 
complete the monopoly which a railroad may enjoy of the 
traffic of a given section, it cannot make this the source of 
monopoly profit if the section happens to be a desert and its 
traffic only sufficient to employ one train a week. It is equally 
incontestable that many of these enterprises have proved enor- 
mously profitable. The railroads in the older and more pros- 
perous portions of the United States have earned immense 
fortunes for hundreds of different investors and speculators 
and promise to earn equally large fortunes for as many more 
before the rates are adequately controlled in the public 
interest. The enormous earnings which the railroads alone are 
capable of m.aking are illustrated by comparing the figures for 
recent years. The year ending June 30, 1900, was considered 
a year of great prosperity in the railroad world, and yet the 
earnings of the railroads of the country increased in the follow- 
ing year, according to the statistician of the Interstate Com- 
merce Commission, about $102,000,000 as regards gross, and 



National Regulation 469 

5,000,000 as regards net. The earnings of the roads in 1902 
were higher than those of 1901, according to the same author- 
ity, by about $147,000,000 as regards gross, and $62,000,000 
as regards net. And these additional earnings were reahsed 
for the most part not by roads which were not paying a fair 
return on capital invested in 1900, or by new roads, but by 
those which even in that year were realising large monopoly 
profits. If to the monopoly profits of the railroads we add 
those of the other national monopolies referred to, we may 
assert without exaggeration that the aggregate return from 
these sources adds its hundreds of millions of dollars to the 
annual income in the United States that is properly character- 
ised as monopoly profit. 

§ 263. Efforts on the part of the State legislatures to regu- National 
late railroads in the United States have encountered an insur- Regulation 
mountable obstacle in the clause in the Federal Constitution 
assigning control over interstate commerce tO' Congress. Their 
power to regulate is limited to the affairs of State roads, and 
these now play a very minor part in the railroad business of 
the country. 

Congress did not bestir itself with a view to regulating rail- The 

roads engaged in interstate commerce until i88S- In that year Interstate 
, f. . , . , . . . . , Commerce 

the Senate appomted a special committee to inquire mto the Act 

evils of railroad management. Its report, submitted the fol- 
lowing year, furnished the basis for the Interstate Commerce 
Act of 1887. The principal provisions of this important meas- 
ure were the following : ( i ) discriminations between persons, 
places, and commodities were prohibited, and railroad officials 
granting discriminating rates were made liable to fine and im- 
prisonment; (2) railway rates for interstate traffic v/ere re- 
quired to be just and reasonable, and any rate not just and 
reasonable was declared to be unlawful, and valid ground for 
a suit for damages by the injured party; (3) railroads were 
required to publish their rates and to change them only on pub- 
lic notice ; (4) they were prohibited from charging a higher 
rate for a short haul than for a long haul over the same line 
and under similar circumstances, unless authorised to do so by 
the Interstate Commerce Commission; (5) pooling contracts 
between railroads were prohibited. The Act also created an 



Defects in 

the Act 



Its Inter- 
pretation 
by the 
Courts 



470 The Railroad Problem in United States 

Interstate Commerce Commission to consist of five members 
and to be responsible for its enforcement and the investigation 
of cases of alleged violation. The powers of the Commission 
were extended by an amending Act passed in February, 1891. 
It may now subpcena witnesses and require testimony, even 
though such testimony is incriminating to the witness giving 
it, and call upon assistant attorneys general to bring suit in 
the name of the United States against offending railroads 
and their officials. 

Notwithstanding its large powers the Interstate Commerce 
Commission has failed to enforce some of the essential pro- 
visions of the Interstate Commerce Act. This has been due 
chiefly to defects in the Act itself of vv^hich the most serious is 
the attempt to prohibit, at one and the same time, discrimina- 
tions and pooling. Experience has shown conclusively that 
competition between railroads involves discrimination. Com- 
petition in the railroad business means in practice making 
special rates to attract special traffic. But experience has 
shown with equal conclusiveness that agreements between rail- 
roads designed to put an end to competition can only be main- 
tained when supplemented by pooling contracts. So long as 
the proportion of freight which each road is to secure depends 
upon its activity, the self-interest of railroad managers, or their 
credulity acted upon by the misrepresentations of unscrupu- 
lous shippers, will make discrimination in rates almost inevi- 
table. The law undertakes to enforce two lines of policy which 
will not run together so long as different railroads act as car- 
riers for the same territory. 

Other defects in the act have been brought to light through 
the interpretation given to it by the Supreme Court. That 
tribunal has decided that a railroad may properly charge less 
for transporting imported commodities from a port of entry to 
their destination within the country than is charged for do- 
mestic products of the same kind, over the same route. This 
decision has deprived the Commission of much of the influence 
it might have had in adjusting freight rates on imported goods 
to those on domestic products. The Court has further held that 
while the Commission may declare any given rate unlawful be- 
cause neither just nor reasonable, it may not prescribe a substi- 



Amendment of 1903 471 

ivite rate which is just and reasonable and therefore lawful. 
Under this ruling the Commission's power is limited to con- 
demning prevailing rates. While in practice this may enable it 
hy repeated rulings to establish the rate it considers fair, it has 
caused needless friction and delay. Even more serious has 
been the repeated failure of the Supreme Court to sustain the 
Commission in its decisions in reference to rates. This has 
been due in part to the policy of attorneys representing the 
railroads of withholding important evidence until appeal* has 
been taken to the United States courts, for the deliberate pur- 
pose of undermining the authority of the Commission. 

An important amendment to the Act was added in February, Amend- 
1903, by which railway corporations are themselves made liable ^'^^^^ ^^ 
to heavy fines for violations of the Act by any of their officers 
or agents and the latter are relieved from the punishment of 
imprisonment provided by the original Act, and by which the 
Interstate Commerce Commission is authorised to secure in- 
junctions restraining railroad companies believed to be violat- 
ing the Act from persisting in such violations. The advantage 
of the injunction process is that it renders any person disre- 
garding it liable to summary punishment for contempt of court 
without the protection afforded by the ordinary rules of evi- 
dence. That these changes in the law will materially assist the 
Commission in its efforts to enforce the Act cannot be doubted, 
but it is the opinion of students of the railroad problem that 
still other amendments will be necessary to insure that degree 
of regulation of the business of the railroads of the country 
which the public interest requires. 

§ 264. Many thoughtful persons, despairing of any solution Arguments 
of the problem presented by natural monopolies along the line ^°\ ?"^ 
of Federal regulation, advocate national ownership and opera- National 
tion of these businesses with the same confidence that they ad- ^f^Ejmre^s 
vocate municipal ownership and operation as a remedy for and 
municipal monopolies. The extension of the postal business of Bustaesses 
the United States to include the express and telegraph business 
is so widely advocated that it may be said to be a living issue. 
Hardly a session of Congress passes that bills are not intro- 
duced having this extension in view and one or other of these 
steps has been advocated with great regularity by recent post- 



472 The Railroad Problem in United States 

masters general of the United States. If both of these busi- 
nesses were not very well managed already and if their charges 
were not kept down by the competition of other agencies for 
communication and transportation, there is reason to think that 
the advocates of public ownership would carry their point. 
The arguments on either side are so similar to those reviewed 
in connection with the discussion of municipal ownership that 
it will be necessary only to summarise them. Few question the 
ability of the Government to manage these businesses effi- 
ciently. Those opposed to national ownership maintain, hovi^- 
ever, that they are already managed as well as they could be b}'- 
the Government and that rates are as low as the Government 
could afford to make them.* They assert further that the threat 
of government purchase and operation is an effective check on 
any tendency these businesses may have to use their monopoly 
power to the disadvantage of the public. In support of national 
ownership it is urged that the Government already maintains in 
its postal system most of the machinery necessary to the con- 
duct of these kindred businesses and that for this reason its 
expenses of operation would be considerably less than they 
are to the private companies which now conduct them. 
Under these circumstances lower rates might be charged. 
Moreover it is insisted that the present method of arranging 
express and telegraph charges does not serve the general 
interest as well as one similar to that of the post-office and that 
government ownership is the only method by which the point 
of view of the managers of these important businesses can be 
changed from that of greatest possible profit to that of greatest 
possible service. 
Arguments The national ownership and operation of the railroads of the 
National United States are a much more ambitious project. In addition 
Ownership to the vastly larger initial outlay that such a policy would en- 
Operation tail and the immense increase of public officials that would re~ 

of the suit from it, there are complexities in the railway business itself 

Railroads , , ' . ^ .• ^ i . ^ 

that make the success of government operation at least prob- 
lematical. The principal arguments on which defenders of the 

* The untested possibilities of wireless telegraphy makes the present 
a decidedly unfavourable time for the government tf venture into the 
telegraph business. 



Arguments against the Policy 473 

government ownership programme rely may be summarised as 
follows : ( I ) Discriminations would cease and in their place 
general tariffs, published in advance, and applying to all ship- 
pers alike, would prevail. (2) Rates might be lower, as the 
roads would have to earn only the two per cent, or so on the 
bonds which the Government might issue in exchange for them 
at the time of purchase, in place of the higher interest and divi- 
dends now demanded by stockholders. (3) In the determina- 
tion of rates broader principles would be considered than those 
on which railway managers base their decisions. The railroads 
would become a great engine for the promotion of industrial 
and social progress. (4) The corrupting influence of private 
railway corporations vv^ould be removed from political life. (5) 
Such an enlargement of the field of government service would 
alter the feeling which the average American entertains for 
holders of public office. A new type would be drawn into the 
public service and the whole plane of official life would be 
raised until the preference would be for it, as has long been the 
case in Germany, instead of for private activity. 

To these optimistic anticipations defenders of private enter- Arguments 
prise in the field of railway transportation oppose the following the^Poiicv 
counter-arguments : ( i ) Rates would become rigid and instead 
of adapting themselves readily to changing business condi- 
tions, as at present, would force business to adapt itself to 
them, with industrial lethargy and stagnation as a result. (2) 
Loss of efficiency in organisation and the methods of operation 
would prevent any lowering of rates under government man- 
agement, at the same time that it would be likely to cause de- 
terioration as regards quickness and convenience of service. 
(3) Substituting for present business principles vague rules in 
regard to social expediency, as guides in the determination of 
rates, would cause confusion without really promoting the ends 
sought. The question as to what constitutes just rates would 
become the favorite theme of demagogues, and even if not 
allowed to influence the rates actually charged, the latter would 
stir up public opinion against the Government in a way that 
must be detrimental to the public service. (4) The decision 
of rate questions as they affect different sections and of ques- 
tions connected with railroad extensions v/ould inevitably get 



Other Con- 
siderations 



Need, of 
Reform in 
Interstate 
Commerce 
Act 



474 The Railroad Problem in United States 

into politics, and injustices even more intolerable than those 
now committed by the privately owned railroads would be 
practised for the sake of party advantage. (5) Far from rais- 
ing the plane of public service, adding so enormously to the 
spoils of each national election would confirm the dominance 
of the corrupt party machine and party boss. 

In addition to these partly theoretical and hypothetical ob- 
jections, the opponents of national ownership emphasise prac- 
tical difficulties. European experience is discredited on the 
ground that no European country requires more than a frac- 
tion of the railway mileage needed by the United States. The 
enormous cost of acquiring the present lines and the difficulty 
of deciding where new lines ought to be built are urged. 
Finally the whole proposal is characterised as a leap in the 
dark, when only the first steps have as yet been taken towards 
trying to regulate the railway business through public commis- 
sions. The last consideration seems to merit most attention 
and is likely to postpone any experiments along the line of 
national ownership until the Interstate Commerce Commission 
itself admits its inability to regulate the railways and demands 
the more radical remedy. 

§ 265. That the Interstate Commerce Act is defective is con- 
ceded by all the various interests which that measure affects. 
Railroad managers criticise its prohibition of pooling. Ship- 
pers urge that if competition cannot be relied upon, the powers 
of the Commission must be increased to a point that will enable 
it to regulate rates. Students of the railroad problem, mean- 
time, desire that fuller powers may be given the Commission 
in connection with the collection and publication of informa- 
tion about the railroad business of the country. These de- 
mands and others have been repeated year after year in the 
reports of the Commission itself and the arguments on either 
side have been clearly stated and exhaustively discussed. In 
its Report for 1895 the Commission enumerated the amend- 
ments which in its judgment were needed to make the evident 
intent of the Interstate Commerce law effective. Some of 
these were included in the amending Act of 1903, but others 
are still lacking. 

The changes most urgently required are believed to be the 



/' Changes in Interstate Commerce Act 475 

following : ( I ) The Commission should be given the power not Changes 
only to declare existing rates unlawful, when complaint of such jngn*^gbv 
rates is made, and " after due investigation and inquiry, upon the Corn- 
notice to carriers, full opportunity having been given for them 
to be heard," but also to prescribe the rates that would be lav/- 
ful under the circumstances and to make its decisions binding 
tjpon the carriers until disallowed by the United States courts. 
(2) It should have control over the freight classifications 
adopted by the railroads, since, as already explained, changes 
in classification are a ready means of changing rates. (3) The 
prohibition against pooling contracts between railroads should 
be repealed. This prohibition rests on the erroneous theory 
that competition is desirable in the railroad business. The 
decision to regulate rates through a public commission is in- 
consistent with the policy of relying on competition. Given 
a commission with adequate power over rates, monopoly in 
the railroad business ceases to be a danger and becomes an ob- 
ject to be desired in the interest both of the railroads and the 
public. (4) In reviewing the decisions of the Commission, 
the Federal courts should be limited to the proceedings before 
that body and should not permit railroad attorneys to bring 
forward as evidence testimony and arguments, which, if perti- 
nent at all, should have been brought forward during the in- 
vestigation before the Commission. Only in this way can the 
dignity of the Commission be upheld. These four amend- 
ments would give the Commission power really to control and 
regulate in the public interest the railroads of the United 
States. Their adoption would soon determine whether gov- 
ernment regulation is a satisfactory solution of the railroad 
problem. Then, to repeat the words of Judge Knapp, Chair- 
man of the Interstate Commerce Commission, " if regulation 
fails, public ownership will be the next and early resort." 

REFERENCES FOR COLLATERAL READING 

* Reports of the Interstate Commerce Commission; Report of the 
tJnited States Industrial Commission, Vols. IV., IX. and* XIX.; 
Hadley, Railroad Transportation; Sh'ckney, The Railway Problem; 
Lewis, National Consolidation of the Railways of the United States; 
Dixon, State Railroad Control; * Johnson, Railway Finance, 



CHAPTER XXV 

CAPITALISTIC MONOPOLIES, OR TRUSTS, IN THE 
UNITED STATES 



Capitalistic 
Monopolies 
or Trusts 



Motives 
for Organi- 
sation of 
Trusts 



§ 266. The last species of monopoly deserving of special con- 
sideration is that represented by the industrial combinations, or 
trusts, which have been characterised as " capitalistic monop- 
olies." As now used in the United States the term " trust " 
applies to any industrial combination which is so large as to be 
the dominant factor in the branch of production with which it 
is concerned. Adany such combinations are not, of course, 
monopolies. Inasmuch, however, as their main purpose ac- 
cording to the unanimous testimony of their promoters is to 
suppress competition, monopoly may be said to be the goal at 
which they are aiming. A reasonable definition of a trust 
would seem to be, " an industrial combination, not a legal nor 
natural monopoly, which seeks to throw off the restraints of 
competition by absorbing, overawing, or crushing its would-be 
competitors." 

The psychology of the combination movement is easy to 
understand. From the point of view of the competitors in any 
line of business, competition is an evil rather than a blessing. 
It tends to lower prices when the interest of each individual 
competitor demands that they be maintained. It has been too 
customary in economics to argue as though the only motive 
of the entrepreneur was to enlarge the volume of his business. 
Quite as strong is his desire to receive high prices for his 
products. When producers are numerous and widely scattered 
and competition between them is active, the individual entre- 
preneur must perforce content himself with such price as the 
market affords, and give most of his thought and attention to 
keeping down his expenses of production by developing his 
business to the size most conducive to efficiency. The latter 
aim often leads him to cut prices in the hope of enlarging his 

476 



The Early Trusts 477 

sales, and is the force on which economists rely when they 
assert that competition tends to keep prices down to the ex- 
penses of production of representative firms. This is the 
situation in all branches of business in which small-scale pro- 
duction is the rule. Another situation is that in which a 
business is already concentrated into a few highly organised 
and shrewdly directed plants and in which the nature of the 
product, a protective tariff, or some other barrier excludes 
foreign competition. Competition between such great indus- 
trial plants may persist, and each entrepreneur may continue 
to seek to derive his profit by producing more cheaply and 
underselling his competitors. But competition is a wearing 
process. It is quite as likely that the competitors may agree 
to combine their plants and seek for profit, not through under- 
selling each other, but through maintaining a remunerative 
price for the common benefit. If to this immediate advantage 
of combination is added the prospect that through it the ex- 
penses of production may be lowered, and the competition of 
firms not in the combination suppressed, its attractions so far 
exceed those of continued independence that a trust is almost 
certain to be formed. As one well-known trust organiser 
expressed it, in words originally applied to the railroad busi- 
ness : " Where combination is possible competition becomes im- 
possible." 

The oldest industrial combination in the United States was The Early 
the Standard Oil Trust, formed in 1882. This was a union of 
oil refineries in Ohio and Pennsylvania, brought about by the 
assignment of the stock of these companies to a board of nine 
trustees who in this way secured complete control of the busi- 
ness. These trustees issued trust certificates in exchange for 
the shares of stock assigned to them and agreed to pay all 
dividends declared on such stock to the holders of these certifi- 
cates. All of the earnings of the different companies were 
pooled, and dividends were declared pro rata on the trust cer- 
tificates, whatever might be the disposition made of particular 
plants taken into the combination. This was, in a literal sense, 
a " trust," and from it all later combinations have derived their 
rather misleading name. Similar trusts were organised by 
leading sugar-refiners and whiskey-distillers in 1887. In 1890 



478 



Trusts in the United States 



The 
Present 

Trusts 



Organisa- 
tion of the 
United 
States 
Steel Cor- 
'^oration 



the Supreme Court of the State of New York, in a case brought 
against the North River Sugar Refining Company, one of the 
corporations belonging to the Sugar Trust, declared this form 
of organisation illegal. The Standard Oil Trust was dissolved 
on similar grounds by the Supreme Court of Ohio two years 
later. 

The organisers of the Sugar Trust lost no time in securing 
a charter from the State of New Jersey * for a single corpora- 
tion, the American Sugar Refining Company, which should 
absorb the plants which had formed the Trust. The certificate- 
holders of the Standard Oil Trust followed a different plan. 
Instead of creating one corporation, the trustees, who happened 
to be the owners, individually, of a majority of the stocks of 
the companies forming the Trust, divided up the shares of these 
companies among themselves in such a way that they con- 
tinued to control them as completely as they had under the 
trust agreement. This arrangement was continued until 1899, 
v/hen the managers of the Oil Trust secured a charter from the 
State of New Jersey for a corporation, the Standard Oil Com- 
pany of America, which has since acquired the stocks of the 
constituent companies in which they were interested. The 
prevailing form of industrial combination has thus come to be 
the single corporation buying outright the property or shares 
of stock of the companies combined in it, and preserving none 
of the characteristics of the original trust except that control 
of the business is still lodged with a small group of men whose 
personal integrity is about the only guarantee which stock- 
holders have that the affairs of the combination will be honestly 
administered. 

Still a third form of organisation was adopted by the United 
States Steel Corporation, chartered in March, 1901, to combine 
the leading steel businesses of the country. According to this 
plan, the new company issued bonds and stock in exchange for 
the bonds and stocks of the constituent companies, but without 
depriving the latter of their existence. The new corporation is 

*The corporation law of New Jersey had been amended in 1889 so 
as to permit companies organised under it to own and control the 
stocks and bonds of other companies. Cf. Meade, Trust Finance, 
Chapter III. 



The Trust Movement 479 

thus a federation of the smaller corporations of which it is 
composed. Its directors select all the officers of the subordinate 
companies, and all the dividends earned by them are turned into 
the general treasury for distribution am.ong the stockholders 
of the larger corporation. 

§ 267. From the time of the organisation of the Standard p\' 
Oil Trust, until January i, 1898, the progress of the trust Trusts 
movement was slow. At the latter date there were in exist- 
ence less than a dozen large industrial combinations, of which 
the principal were: The Standard Oil Trust, the American 
Sugar Refining Company, the American Tobacco Company, 
the United States Rubber Company, the United States Leather 
Company, the American Cotton Oil Company, and the Glucose 
Sugar Refining Company. The aggregate capitalisation of 
these seven combinations was less than $500,000,000. 

During the years 1898 to 1900 there ensued a veritable stam- Progress 
pede among the managers of businesses of all kinds to enter Trust 
into combinations. According to a reliable estimate 149 large Movement 
combinations, with a capitalisation of over $3,000,000,000, 
were formed during these years. The United States Census 
Bureau made an investigation of the industrial combinations 
carrying on business in the United States on May 31, 1900. Its 
inquiry was limited to bona fide combinations, that is, to plants 
that had formerly appeared as competitors, and in consequence 
several enterprises {e.g., the Carnegie Steel Company) which 
are usually thought of as trusts, were not considered. Accord- 
ing to the Census Report, there were in the United States, on 
the given date, 183 industrial combinations controlling 2029 
plants. The capitalisation of these corporations was a little 
over $3,000,000,000, of which about $1,800,000,000 was repre- 
sented by common stock, $1,000,000,000 by preferred stock, 
and $216,000,000 by bonds. These figures are more conserva- 
tive than those given by financial papers for the same period, 
and are certainly not exaggerated. Since the Census inquiry 
was made, several new combinations, including the giant United 
States Steel Corporation, have been effected. The capital of 
the latter company alone was $1,400,000,000, of which $304,- 
000,000 were represented by bonds and the remainder was 
divided equally between common and preferred stock. It 



48o 



Trusts in the United States 



Th9 

Motives of 
Manu- 
facturers 



would be misleading to add the entire capitalisation of this new 
corporation to the figures given in the Census Report, as most 
of its stock represents the stock of constituent companies which 
figured in that investigation. At the same time, some $500,- 
000,000 ought to be added on its account, as its capitalisation 
was generously watered. Taking this and other recent com- 
binations into account, $5,000,000,000 is believed to be a conser- 
vative estimate of the aggregate capitalisation of the industrial 
combinations doing business in the United States on July i, 
1903. 

§ 268. The remarkable progress of the trust movement after 
January i, 1898, suggests a connection between it and the con- 
temporaneous revival of business prosperity. What that con- 
nection was is easily explained. The motives which led manu- 
facturers to enter the trusts were the desire to suppress compe- 
tition and to realise the economies of combination. By them- 
selves these motives lost rather than gained in strength with 
the revival of prosperity. Working with them, however, was 
the motive of the stock operator. Promoters, underwriters, and 
" insiders " generally, wished to realise profits from the sale of 
new securities on a buoyant stock market, and these were the 
men who were most active in bringing about the combinations. 
The country had just passed through four years of serious busi- 
ness depression. Failures had been common, and even firms 
which succeeded in avoiding bankruptcy had felt to the full the 
pressure of a relentless competition. It was in this period that 
the phrase " competition is the death of trade " became current 
and that the benefits of combination as exemplified in the suc- 
cessful trusts, the Standard Oil Company, the American Sugar 
Refining Company, and the American Tobacco Company, were 
extolled. There seemed no reason why similar combinations 
might not be effected with equal success in other branches of 
business. The favourable mental attitude of business managers 
was paralleled by a very hopeful feeling on the part of the 
investing public. After the long years of depression, the large 
returns to agriculture and other branches of industry enjoyed 
in 1897 set free a large surplus for investment. There was thus 
a ready welcome for the new securities of the industrial com- 
binations, which were made to seem even more promising than 



The Activity of Promoters 481 

railroad stocks had appeared during the golden age of railway 

promotion. 

Several of the combinations organised in 1898 resulted from The 

the activity of energetic manufacturers in whom their associ- ■^c*^^^^ ^^ 
•" ° Promoters 

ates and former competitors had confidence. They were literally 
** combinations " of former competitors, spontaneously entered 
into for mutual advantage. As time went on, however, it became 
more and more the rule for combinations to be effected by pro- 
fessional promoters, who made up for their ignorance of the 
practical details of the businesses that they proposed to unite by 
their knowledge of finance and their skill in persuading others 
of the merits of their plans. The method usually pursued by the 
professional promoter was as follows : The leading competitors 
in the selected branch of industry were first persuaded that 
combination would be a good thing for the trade as a whole 
and induced to give their assent to the general plan of organi- 
sation. This task was usually easy. Expert appraisers were 
then set to work to determine the cash value of the plants to be 
combined. Armed with information so obtained, the promoter 
had next to bargain with the owners of the different plants to 
determine the terms upon which they should enter the com- 
bination. Meantime, a charter was secured, usually from the 
State of New Jersey, authorising a certain aggregate issue of 
common and preferred stock, and arrangements were made with 
«ome private banking or trust company to finance the under- 
taking. The usual arrangement made with individual owners 
was that for each plant taken into the combination preferred 
stock,* equal at par to the assessed value of the business, plus 
a bonus of an equal amount of common stock, should be given. 
Often, however, it was necessary to pay the assessed value of 
the desired business in cash and sometimes to pay considerably 
more than this assessed value. At this point the assistance of 
the underwriter would be needed. The arrangement between 

* Preferred stock is stock which enjoys a preference as regards both 
dividends and assets. The rate of dividend to which it is entitled 
must be paid before any dividend can be declared on the common 
stock. Frequently the preferred dividends are made " cumulative," 
that is, when unpaid in any year, they constitute a prior lien upon the 
earnings of the company in succeeding years and must be fully met 
"before any dividends can be declared on the common stock. 



482 



Trusts in the United States 



Reasons 
for 

Formatioti 
of Steel 
Trust 



promoter and underwriter was usually that preferred stock to 
a certain aggregate amount should be taken at a certain price 
and paid for in cash, as the latter might be required. To this 
preferred stock might be added, as a bonus, an equal or even a 
larger amount of common stock. Besides the cash needed to 
purchase the plants of reluctant owners, the promoter usually 
required money in the treasury to insure the initial success of 
the combination. This also was secured from the underwriter^ 
The promoter's own profit might come in the form of cash 
received from the underwriting syndicate, or in the form of 
stock in the new enterprise, to be held or sold as his judgment 
might determine. How largely it was sometimes necessary to 
overcapitalise a combination, In order to satisfy the demands of 
all those connected with it, is illustrated by the case of the 
Whiskey Trust. According to testimony presented before the 
Industrial Commission, for each $100,000 cash value of the 
plants taken into the combination $100,000 preferred stock and 
$100,000 common stock went to the owner, $150,000 common 
stock went to the promoter, and $100,000 preferred and $150,- 
000 common went to the underwriter, the latter being required 
to furnish a certain amount of cash to serve as the working 
capital of the enterprise. Professor Jenks calculates that the 
promoters and underwriters of the trust received $10,700,000 in 
preferred and $13,360,000 in common stock, in exchange for 
$3,500,000 in cash. What their profits were it is impossible 
to say, but judging from the quotations for the stock immedi- 
ately after the combination was launched, they probably 
amounted to several million dollars. In another case, that of 
the Tin Plate Trust, evidence was presented before the Indus- 
trial Commission showing that the promoter received $10,000,- 
000 in common stock for his services, and that he probably real- 
ised $2,000,000 to $3,000,000 profit from the undertaking. 
These facts indicate the motives of promoters and under- 
writers and account for their activity in bringing the trusts 
into being. 

One important combination, the United States Steel Cor- 
poration, was organised for somewhat different reasons. 
The combinations of previous years had concentrated the man- 
agement of the iron and steel businesses of the country into a 



The Steel Trust 483 

few hands. The strongest and most aggressive of the steel 
manufacturers was Mr. Andrew Carnegie, whose plants were 
devoted partly to the production of materials to be made up 
into more finished forms by other manufacturers. During the 
year 1900 and the early months of 1901 the competition between 
the great steel companies assumed a very threatening aspect. 
The trusts were developing in a direction which made them less 
and less dependent upon the Carnegie Company for their mate- 
rials, and Mr. Carnegie, on his side, was threatening to enter 
upon the manufacture of additional finished products. A steel- 
hoop plant was actually built by his company and plans were 
made for a large tube mill. All those interested, and especially 
the managers of the trusts, who recognised the superior or- 
ganisation and efficiency of the Carnegie Company, shrank 
from the outlays which would have been involved in this 
threatened competition. It was estimated that plans under 
consideration in January, 1901, called for the expenditure of 
from $150,000,000 to $250,000,000 in the duplication of iron 
and steel plants for the sole purpose of wresting business from 
competitors. It was at this point that Mr. J. P. Morgan was 
appealed to to reconcile the conflicting interests by combining 
the earlier combinations and the Carnegie Steel Company into 
a billion-dollar trust. Mr. Carnegie himself appears to have 
been the least eager of those concerned for the combination. 
At any rate, he was induced to come in only on terms far more 
favourable than those accorded to any of his competitors. In 
this instance, combination resulted from the fear of the de- 
structive effects of competition between companies which had 
already become so large as to make competition of that life- 
and-death order that has become familiar in connection with 
railroad enterprises. The com.bination was not accomplished, 
of course, without the assistance of an underwriters' syndicate, 
and the remarkable success of the Corporation during the years 
1901 and 1902 made the profits of this syndicate large even in 
comparison with the returns from other successful trust opera- 
tions. As much as $50,000,000, or 200 per cent., on the 
money they were actually called upon to advance, v/as divided 
among its members. 
^§ 269. That professional promoters had much to do with 



484 



Trusts in the United States 



Distrust 
of Trusts 
on the 
Part of 
the Public 



The 

Successful 

Trusts 



the organisation of many of the trusts is indicated by their 
financial results. Of the 183 industrial combinations investi- 
gated by the Census Bureau in 1900, but 121 paid dividends. 
Moreover, of the ninety-two paying dividends on their pre- 
ferred stock, only thirty paid also on their common stock. 
Thus one-third of the total number paid no dividends at all 
and another one-third paid no dividends to common-stock 
holders. The estimation in which business men hold trust 
securities is indicated by the relatively low prices at which the 
stocks even of those which have paid dividends since the date 
of their organisation may be purchased. United States Steel 
preferred, which is entitled to a cumulative dividend of 7 per 
cent., has never been quoted much above par and in November, 
1903, was quoted as low as 50, although dividends had been 
regularly paid on the common and large surplus earnings had 
been accumulated. Even the older trusts are still far from 
commanding the confidence of the public. In the year 1901 
the stock of the Amalgamated Copper Company (the Copper 
Trust) fell from 130, its highest price in June, to 6o/^ in 
December. During the year as many as 11,826,038 shares of 
this stock, of which the total issue amounts only to 1,550,000 
shares, changed hands on the New York Stock Exchange. 
In the same year the price of the common stock of the 
American Sugar Refining Company, one of the oldest and 
most ably managed of the trusts, fell from June to December 
from 153 to 103/^. The sales of this stock aggregated 
8,174,362 shares, or more than eleven times the total issue. 
These violent fluctuations in price, coupled with the large 
volume of dealings, illustrate fairly well the attitude of inves- 
ors toward the trusts. Conservative capitalists avoid them 
altogether, and those who do purchase their securities are 
easily frightened into selling again by every unfavourable 
rumour. 

Striking as has been the failure of some of the recent com- 
binations, it is not to be denied that the success of others is 
even more noteworthy. Confining attention to the three trusts 
that have paid dividends over the longest period of years, we 
may note the following facts : The Standard Oil Company paid 
dividends on its capital of $100,000,000 at the rate of 12 per 



Control of Trusts over Production 485 

cent, from 1891 to 1895. In 1896 it paid 31 per cent., in 1897 
33 per cent., in 1898 30 per cent., in 1899 33 per cent., in 1900 
and 1 90 1 each 48 per cent., and in 1902 45 per cent The 
American Tobacco Company began paying dividends on its 
common stock at the rate of 12 per cent, a year in 1893. This 
rate was continued in 1894 and 1895. In 1896 6 per cent, and 
a 20 per cent, stock dividend were paid. In 1897 the rate on 
the enlarged capitaHsation was 9 per cent, and in 1898 8 per 
cent. In 1899 7 per cent, and a 100 per cent, stock dividend 
were paid. Six per cent, on the increased capitaHsation was 
paid in 1900 and 1901, and 9 per cent, in 1902. In addition, 
this company has paid continuously 8 per cent, annually on its 
preferred stock. The American Sugar Refining Company paid 
4 per cent, on its common stock in the year of its organisation. 
The following year, 1892, it paid io}A per cent., in 1893 213^ 
per cent., from 1894 to 1899 12 per cent, annually, in 1900 7^ 
per cent., and in 1901 and 1902 each 7 per cent. This com- 
pany has also paid regularly 7 per cent, on its preferred stock. 
Comment on the above showing is hardly necessary. Even on 
the assumption that all three of these enterprises were con- 
servatively capitalised at the outset, their success far exceeds 
anything to be found in the annals of competitive business. 

§ 270. In every branch of production in which trusts have Extent of 
been formed in the United States, some semblance of competi- Trustsover 
tion has been preserved. Thus even the Standard Oil Com- Production 
pany is said to control (January, 1903) only about 65 per cent, 
of the refined, and an even smaller proportion of the crude 
mineral oil production of the country. In his testimony before 
the Industrial Commission, Mr. Havemeyer, president of the 
American Sugar Refining Company, put the sugar output of 
the Trust, in 1900, at about 90 per cent, of that of all the refin- 
eries in the United States. Representatives of the United States 
Steel Corporation stated before the Commission that its product 
equalled from 65 to 75 per cent, of the total steel output of the 
country. Other testimony indicated that the United States 
Rubber Company produced 70 per cent, of all the rubber boots 
and shoes manufactured in the United States ; that the Inter- 
national Paper Company produced 70 per cent, of the news- 
print paper of the country; that the National Salt Company 



486 Trusts in the United States 

controlled from 80 to 90 per cent, of the salt produced east of 
the Rocky Mountains ; that the Pittsburg Plate Glass Com- 
pany controlled about 72^^ per cent, of the total output of plate 
glass ; and, finally, that the National Starch Company produced. 
90 per cent, of the country's box starch. These figures are 
fairly typical of the trusts generally. 
Resulting Although not entirely without competitors, trusts which con- 

over Prices ^^^^ ^ P^^ cent, or more of the total supply of a commodity ma}^ 
unquestionably regulate its price within considerable limits and 
for considerable periods of time. Independent producers will 
compete with the combination by lowering prices only to the 
extent necessary to sell the output of their plants. As their 
product satisfies only 40 per cent, of the demand, the public 
must also purchase from the trust. The latter may put up the 
price, at least temporarily, to any point it pleases below that 
which so curtails the demand that the independent producers 
can supply the whole market. Independents will adjust their 
prices to the trust price, cutting under the latter only enough 
to insure the sale of the outputs of their plants. Any falling 
ofif in demand due to the higher price fixed by the trust will 
affect the trust's business, but unless the falling off is very 
marked, or the conditions are such that independents can 
quickly enlarge their producing capacities, the trust managers 
may for some time maintain the price and reap a monopoly 
profit. In case the trust desires to lower the price, on the other 
hand, it can compel independents to follow its lead, as it usually 
has a much larger producing capacity than it normally uses. 
Thus, President Havemeyer said of the Sugar Trust that while 
it actually supplied only 90 per cent, of the country's demand, 
it could supply 120 per cent. This flexible producing capacity 
characteristic of the trusts enables them to enforce lower prices 
even in the face of an active demand, or to prevent prices from 
rising when an increase in the demand would tend to elevate 
them. 
Limits to In the exercise of its control over prices a trust must, of 

course, use great caution. Fixing the price considerably above 
the expenses of production invites competition, and if such a 
price is maintained it will only be a question of time when the 
trust's output shall become such a small proportion of the total 



Opinions in Reference to Trusts 487 

sapply that its dominant position in the industry is lost. Es- 
tabHshing too low a price, on the other hand, means loss to 
the trust as well as to independent competitors. Though, gen- 
erally speaking, the trusts can afford larger losses than inde- 
pendent companies, it is doubtful whether they can afford to 
sell below cost for a longer period than their rivals. Their 
resources are larger, but their losses on their larger sales would 
be proportionately greater. The usual result when a trust 
adopts the policy of selling below its expenses of production is 
not to bankrupt the competitor, but to persuade him to throw 
in his fate with that of the combination. Judging from the 
experience of the Sugar Trust, the terms on which losing com- 
petitors may be induced to enter a losing combination in the 
hope of establishing a profitable combination are not always 
unfavourable to the independents. 

It is a debatable question whether the control which the Conflicting 
typical trust is able to exercise over price, because of the large Reference 
proportion of the product which it supphes, increases or de- to Trusts 
creases with the passage of time. Some investigators maintain 
that the trust form of organisation is favourable to economical 
production, and that a well-managed trust, once launched, will 
dominate to an increasing extent the business with which it is 
concerned. Other writers argue that but for certain unfair 
practices, none of the trusts would be able to hold their 
own for any great length of time, and that the suppression of 
such practices would soon demonstrate that competition is an 
irrepressible force in a country in which an equal system of 
justice prevails. Still others go so far as to say that the force 
of competition is so persistent that not only the alleged econo- 
mies resulting from combination, but also the unfair practices 
complained of are powerless to suppress it. They interpret 
the trust movement as a gigantic swindle perpetrated on the 
investing public by promoters and underwriters who have been 
fa,voured by a period of great industrial prosperity in their 
effort to make the trusts appear to be sound business enter- 
prises. These writers see at every hand signs that the trusts 
are on the road to failure, and look to the next period of in- 
dustrial depression for the proof of their theories. To decide 
intelligently between these opposing views, one must come t9 



488 Trusts in the United States 

some conclusion in regard to the economies in production 
which are credited to the trusts. 
Economies § 27 1. In addition to the general economies resulting from 
Trusts large-scale production, and already discussed in Chapter 

VIII., Section 85, there are special advantages which pertain 
to combinations. One consideration favourable to the trusts 
is that after the first step separating the individual firm from 
the corporation with a salaried president or manager has been 
taken, there need be no increased loss of efficiency as the 
business grows. Since reliance for the direction of the enter- 
prise is put in any case in salaried employees, it makes little 
difference whether these employees are few or many. An able 
president may hold the managers of the individual plants over 
which he has general supervision to as strict account for the 
efficient performance of their duties as that to which the direct- 
ors hold him himself. The larger the enterprise the larger is 
the salary which it can afford io pay to its responsible manager 
and the abler the manager whose services it can command. It 
follows, it is claimed, that instead of losing in efficiency on 
account of its size, a trust gains in efficiency. The truth of this 
contention depends obviously upon whether the higher salary 
paid by a trust to its chief executive really secures the highest 
grade of ability. The three combinations which have succeeded 
most brilliantly have, undoubtedly, been directed with re- 
markable skill and foresight. They have devised plans for 
securing the loyal co-operation of their thousands of employees, 
and have selected for important positions the best men to be 
had for the tasks assigned them. The phenomenal success of 
the Carnegie Steel Company before it was merged into the 
trust furnishes an example of what may be achieved through 
organisation. As the result of thought and experiment, Mr. 
Carnegie and his associates devised methods by which every 
employee in every department of the business, from highest to 
lowest, was made to feel as keen an interest in the result 
of his day's work as though he were to be the sole beneficiary 
from it. High wages and salaries were paid, and the prospect 
of still higher remuneration was held out to all who could in- 
crease their productiveness. The result was a business which, 
in spite of its huge proportions — its earnings were said to be 



Reduced Expenses for Advertising 489 

$70,000,000 in a single year — compared in efficiency in every 
department with any other enterprise, large or small, to be 
found in that branch of industry. But the same circumstances 
that enable efficient chief executives to contribute so largely 
to the success of trusts increase the power for injury of 
inefficient managers. The presidents of the highly success- 
ful trusts have been willing to devote their unusual abilities 
to the great enterprises with which their names are identified 
because these were, in a real sense, their enterprises. The 
services of such men cannot be secured by the mere payment 
of high salaries. It is here that a serious obstacle to the 
permanent success of great industrial combinations is en- 
countered. The few men who have the ability to direct such 
vast enterprises are increasingly in demand, and the chance 
that a board of directors which has chosen a president wisely 
once will do so again, and yet again, is small. These consider- 
ations suggest a reason for the phenomenal success of some of 
the trusts and for the no less meteoric failure of others. 

A more certain advantage of trust organisation is economy Reduced 
in connection with the sale of products. A large part of the for^Xdver. 
expenditure for advertising, travelling salesmen, etc., necessary tising 
to success in competitive businesses, is necessary simply because 
of the competition. The sale of whiskey and tobacco, for in- 
stance, is probably not increased materially by the hundreds of 
thousands of dollars expended annually on advertising. The 
sale of particular brands, however, is increased. A combina- 
tion which unites all of the plants producing different brands 
under one management dispenses with the need for competi- 
tive advertising. The more complete the monopoly of the 
combination the more fully, obviously, it may economise, in 
this department of its business. The testimony obtained by the 
Industrial Commission teems with illustrations of this species 
of economy. It was stated that the American Steel and Wire 
Company dismissed nearly two hundred of its travelling sales- 
men, without any loss in efficiency. The whiskey combina- 
tion dispensed with three hundred of its salesmen, and thereby 
effected an annual saving in salaries estimated by its president 
at $1,000,000. Other ways in which combination lessens 
expenses in selling goods were brought out by different wit- 



490 



Trusts in the United States 



Saving 
in Cross 
Freights 



Better 
Adaptation 
of 

Production 
to Demand 



Minor Ad- 
vantages 



nesses. Thus, the practice of giving premiums may be dis- 
continued, as also that of granting credit to customers whose 
business standing is doubtful, in order to retain their trade. 

A third advantage, especially in connection with trusts pro- 
ducing bulky articles, is a saving in cross-freights. In the salt 
business, for example, the cost of freight is a principal item of 
expense. The National Salt Company, having wells in differ- 
ent sections, is able to fill each order from the plant nearest the 
town from which the order comes. It is thus able to supply 
salt at much less expense, the country over, than could a com- 
pany whose wells were all in one place. The same principle 
applies in the iron and steel business. Thus an officer of the 
American Steel and Wire Company told the Industrial Com- 
mission that his company saved, by having plants at different 
points, at least $500,000 a year on its freight bill. This ad- 
vantage does not apply, of course, to local competitors who 
aim to secure merely the local market. 

A fourth advantage is that trusts can adjust the output of 
their plants to the irregularities of the market better than 
smaller producers. Not only are they in a position to get a 
broader view of market conditions, but they may organise their 
different plants so that those in the sm.aller places, where the 
labour supply is less steady and reliable than in large cities, 
may be run continuously, while the latter may be run or shut 
down as the conditions of the market demand. Thus, the 
American Sugar Refining Company is said to use its Brooklyn 
Refinery as a sort of safety valve to its business. When the 
demand for sugar is active and the trust is understocked, its 
rate of production can be largely increased at a very small cost 
by running this refinery at top speed. In the face of adverse 
conditions a curtailment of production is equally easy. 

Among minor advantages claimed for the trusts, as distinct 
from advantages enjoyed b)^ all large-scale producers, is the 
ability to satisfy the different tastes of consumers by offering 
a varied stock of goods. This is believed to have been an im- 
portant circumstance in connection with the success of the 
American Tobacco Company. A similar advantage is ability 
to supply on demand a practically unlimited quantity of any 
good. It is stated that the American Sugar Refining Company 



Illegitimate Practices 491 

is able to get one-eighth of a cent a pound more for its sugar 
than its competitors because jobbers prefer to order where they 
can be sure of securing at once all that they require. These 
Tarious advantages which contribute in greater or less degree 
to the success of the trusts may be called legitimate, because 
they enable the trusts to perform the same services for the 
public more cheaply than could competing independent 
companies. 

§ 272. Critics of the trusts charge them with three lines of IHegiti- 
policy that are squarely opposed to the general interest and Practices 
therefore illegitimate. They are said to obtain discriminating of the 
rates from the railroads in defiance of the Interstate Commerce 
Act, to take advantage of their national position to cut prices at 
certain points in order to stifle competition while recouping 
themselves by maintaining prices at non-competitive points, 
and finally to make unfair contracts with jobbers and retailers 
under which the latter boycott the products of independent 
producers. 

The trust which has been most widely accused of securing Obtain- 
special favours from the railroads is the Standard Oil Com- oi^crimi- 
pany. That such favours were commonly enjoyed prior to the nations 
enactment of the Interstate Commerce Act has been proved Railroads 
beyond question. Subsequently, according to the directors of 
the Trust, it has paid the same rates on oil as other shippers. 
Its critics do not deny this, but claim that it has continued by 
indirect means to enjoy many special advantages over its com- 
petitors. In the first place it has secured control of most of 
the important pipe lines conveying crude petroleum from the 
"wells to the points where it is refined. In its management of 
these pipe lines it should be controlled by the law which re- 
quires common carriers to accord equal treatment to all ship- 
pers, but it is claimed that it constantly discriminates in its own 
favour. It is so much cheaper to pipe the oil than to ship it 
hy rail that this gives it a marked advantage over its competi- 
tors in many of the most important markets of the country. 
Again, in consequence of the large scale of its operations the 
Standard Oil Company is able to maintain a full equipment of 
tank-cars, receiving tanks, and tank wagons in all parts of the 
countrv and secures from the railroads lower rates for tank 



492 Trusts in the United States 

than are charged for barrel shipments, often the only sort opeii 
to " independents." Finally it is alleged, though it cannot be 
said to have been proved, that the tank cars of the Standard Oil 
Company are sometimes underbilled so that the actual rate is 
considerably below even the favourable nominal rate. Ob- 
taining discriminating freight rates has been charged against 
the Steel Trust also. Although little evidence of such dis- 
crimination has been furnished, attention has been called to the 
fact that the same men who are directors of the important rail- 
roads of the country are directors of the Trust. It is urged 
that it is not to be expected of human nature that men so placed 
will not make one hand help the other. 
Price Dis- More definite evidence is forthcoming in reference to the 

among second charge, that is, that the trusts cut prices in local markets 

Places to kill competition, while they maintain or raise them in markets 

where there is no competition. The Industrial Commission 
made an exhaustive inquiry into the wholesale and retail prices 
paid in different towns in different parts of the United States 
for petroleum, sugar, and Royal Baking Powder. As a result 
of this inquiry it seems to be established beyond question that 
the Standard Oil Company charges different prices for the 
same product at different points, depending upon the intensity 
of competition. The investigation showed that on or about 
February 15, 1901, the price of a certain standard grade of re- 
fined oil was 6 cents per gallon at Chicago, and 5.5 cents per 
gallon at Detroit, Pittsburg, and other highly competitive 
points. The Chicago price had been maintained for some time 
and hence could fairly be assumed to cover the expenses of pro- 
duction to the Trust. Taking it as a basis, the Report shows 
that at Richmond, Va., the price had lately been cut to 5 cents 
per gallon in consequence of competition ; that at Florence, 
Ala., on the other hand, the price was 10.5 cents although the 
freight rate from Whiting, where the Standard's large Chicago 
refinery is located, was only 2.8 cents. At Little Rock, Ark., 
the price was 11.5 cents, although the freight rate from Whiting 
was only 1.9 cents. At Denver, Colo., the price was 16 cents, 
although the freight rate from Whiting was only 4.9 cents. 
Similar discrepancies were found at other points, and although 
special circumstances may doubtless explain some of them, it 



Unfair Contracts with Dealers 493 

seems proved beyond a doubt that the policy of the Company 
is as alleged. Inquiry in reference to the price-making prac- 
tices of the other trusts was less conclusive. Direct interroga- 
tion of some managers indicated, however, that the practice of 
making special prices to fit special localities was not only 
common, but that it was looked upon as entirely proper 
and defensible. Mr. White, president of the National Salt 
Company, said that " Naturally, his company sold low where 
there was competition and recouped itself ofif of the general 
market." Evidence was presented indicating a similar policy 
on the part of the Continental Tobacco Company, Thus it 
was claimed, and admitted by the president of the company, 
that the American Beauty cigarettes were sold in North Caro- 
lina and Virginia for $1.50 per thousand, with 2 per cent, off 
for cash, while the same brand was sold in New York for a 
much higher price. Critics of the Trust alleged that the cut 
was part of an effort to drive out the Carolina Bright ciga- 
rettes manufactured by a rival company. This the Continental 
Company denied, asserting that the cigarettes referred to 
were sold for less than the Government tax for the purpose 
merely of introducing the brand. As a result of its inquiry^ 
the Industrial Commission concluded, " that it is prob- 
able . . . that the acknowledgment of similar practices would 
be made by managers of other combinations, but such testi- 
mony has seldom been given." 

The third charge, that is, that some of the trusts con- Unfair 
strain jobbers and local dealers to boycott other products, can- Contract 
not be said to be proved in any large number of cases. This Dealers 
may be due, however, to the difficulty of getting the interested 
parties to testify, rather than to the infrequency of such prac- 
tices. Two cases were investigated at some length by the In- 
dustrial Commission. It was claimed, and admitted by an 
officer of the company, that the Eastman Kodak Company, 
acting as agent for the General Aristo Company, sold the 
goods of the latter association at a 15 per cent, trade discount 
and an additional discount of 12 per cent, to dealers who 
handled only such goods. It was even admitted that the East- 
man Company would probably not sell to dealers handling 
rival products. The other case was that of the Continental 



494 Trusts in the United States 

Tobacco Company, which was charged with forbidding re- 
tailers who handled its brands of tobacco from dealing in other 
brands. It may readily be seen how a company controlling a 
large number of the favourite brands of a commodity like 
tobacco might, by pursuing this policy, prevent the public from 
acquiring a taste for other brands. As regards commodities 
which are to a less extent matters of taste, limiting dealers to 
trust products might not be of any particular aid to a trust 
in preserving its monopoly. 

It needs no extended argument to prove that a trust resort- 
ing to the kinds of competition described above may make its 
position well-nigh impregnable so long as it contents itself 
with the modest monopoly profit of 48 per cent, which the 
Standard Oil Company distributed to its stockholders in 1900 
and 1901. Such practices are as demoralising in their in- 
fluence upon business and the standards of business men 
as are discriminations on the part of the railroads of the coun- 
try, and like the latter they should be prevented at whatever 
cost to the Government. 
The § 273. The view expressed in Mr. Havemeyer's striking 

the Trusts phrase, " the protective tariff is the mother of trusts," merits 
some consideration. His argument is that the higher duties 
charged on many products in the tariffs of 1883, 1890, and 
1897 permitted a margin of profit to domestic producers 
which encouraged the reckless duplication of plants and ruin- 
ous competition. To escape the latter, trusts were organised. 
If the tariff had not guaranteed immunity from foreign com- 
petition, no one would have cared to embark his capital in 
them. Once established, as a result of the artificial condi- 
tions created by the tariff, the trusts enjoy advantages over 
their competitors whenever that tariff is changed. In the 
United States sweeping changes in the tariff were made in 
1890, 1894, and 1897. The changes were specially marked 
in the case of sugar. The Sugar Trust, even though it may 
have had no influence in determining the changes made in the 
sugar schedule, enjoyed the advantage of more intimate ac- 
quaintance with what was going on in Congress, and of a vast 
capital with which to make the most of the changes that were 
foreseen. 



Other Evils Connected with Trusts 495 

That some of the trusts in the United States have been 'I'he 
encouraged and fostered by the protective tariff few will deny. Mother of 
It is even probable that some of them have grown up in in- Some 
dustries which would not have flourished at all but for the 
tariff. Others, doubtless, would not have been established 
had not the tariff been high enough to protect them from 
foreign competition. At the same time it is equally certain 
that many of the trusts have been organised in industries that 
are in no wise dependent upon the tariff. Some of the latter, 
notably the Standard Oil Company, have enjoyed greater suc- 
cess for a longer period than any of the tariff-made trusts. If 
further proof of the independent origin of trusts is needed it 
may be found in free-trade England where trusts are not 
unknown, although undoubtedly less numerous than in the 
United States. Mr. Havemeyer's dictum ought probably to 
be changed to the statement that " the tariff is the mother of 
some trusts." Wherever such maternity can be established a 
modification of the tariff may prove a sufficient means of con- 
trol, but it is also true that some of the tariff-made trusts have 
outgrown their leading-strings and have now little to fear 
from foreign competition. 

§ 274. Among other evils charged against the trusts three Other 
merit special attention: they are overcapitalised, they cor- Overcapi- 
rupt public officials, and they ask excessive prices for their talisation 
products. In Section 268 abundant evidence was given of the 
tendency to overcapitalisation. Trust organisers themselves 
do not deny that the combinations are capitalised often for 
two or three times the value of the tangible property which 
goes into them. They justify such overcapitalisation on the 
ground that, in addition to this tangible property, there are 
patents, the good will of the business, and the probable appre- 
ciation of certain kinds of property, such as mineral lands, to 
be considered. They urge further that the basis of capitalisa- 
tion should be not tangible assets, but earning power. As re- 
gards most of the trusts there is no doubt that, even if full al- 
lowance is made for intangible assets, earning power, etc., there 
still remains a large amount of nominal capitalisation for 
which there is no equivalent in present or prospective value. 
Many trust promoters frankly admit the overcapitalisation 



496 Trusts in the United States 

complained of, and take their stand on the proposition that 
overcapitalisation harms no one. They argue that it is in- 
different whether the nominal capitalisation of a business is 
$1,000,000 or $2,000,000. If in the former case its stock is 
quoted at par, in the latter case, they assume, it will be quoted 
at 50 per cent, of par, and the only result will be that two 
shares are regarded as one share would have been, had the 
capitalisation been more conservative. Such apologists for 
overcapitalisation overlook important aspects of the ques- 
tion. While it is true that if all of the facts in the case were 
known to all of the parties interested, it would make little 
difference what the nominal capitalisation might be, this is 
far from true when, as is usually the case with the trusts, 
knowledge of the essential facts is confined to a small group 
of directors. At least three evils may be traced to over- 
capitalisation: It leads to the wholesale swindling of the in- 
vesting and speculating public which still believes, in spite of 
many sad experiences, that the par value of stock bears some 
relation to its real value. It invites the deception of officials 
charged with the enforcement of tax laws. When nominal 
capitalisation throws no light on the value of corporate prop- 
erty for purposes of taxation, there is every opportunity for 
those interested to deceive assessors as to the real value that 
ought to be taxed. Finally, it encourages mismanagement on 
the part of the company itself. However much the stock of a 
company may be watered, it is but natural that its responsible 
officers should desire to pay dividends. In the effort to per- 
form this often impossible task they are apt to adopt lines of 
policy of which they would not have thought had the business 
been conservatively capitalised and only reasonable earnings 
demanded of it. In the case of the trusts such mismanagement 
has injured the public as well as stock-holders in the enter- 
prises affected. 
Corruption The second evil, that is, the corruption of public officials, is 
Official.^ by no means confined to the trusts, but with them it assumes 
special significance. Trust managers have been accused of 
influencing legislation through contributions to campaign 
funds, of securing the election or appointment of officials 
favourable to their interests, of bribing attorneys-general to 



Excessive Prices for Trust Products 497 

refrain from enforcing anti-trust acts, and even of corrupt- 
ing courts charged with the interpretation and enforcement of 
adverse laws. Proof of these accusations is rarely forthcom- 
ing, but this is believed to be rather because those possessing 
such proof have every interest to withhold it than because the 
accusations are altogether unfounded. As the control of the 
trusts and the railroads of the country comes to be concen- 
trated in fewer and fewer hands, their corrupt political in- 
fluence is only too likely to increase unless vigorous steps are 
taken to curb it. 

The claim that the trusts charge excessive prices for their Excessive 
products is also difficult of direct proof. So many and such ^"^g^ ^^ 
diverse influences affect the prices of commodities that it is Products 
almost impossible for those unfamiliar with every detail of 
the business concerned to judge whether a given price is or is 
not excessive. Notwithstanding these difficulties, an interest- 
ing investigation into the influence of the trusts on prices was 
made by Professor Jenks on behalf of the Industrial Commis- 
sion. His conclusions were, on the whole, distinctly adverse 
to the contention of trust apologists that they reduce prices in 
consequence of the great economies they are able to realise. 
In the most notable instance of lowered prices under trust 
management, that of refined oil, it appeared that the reduction 
was less, on the v/hole, than the decline in the price of crude 
oil, and consequently that the margin retained by the trust 
to cover its expenses of production and profit was larger than 
it had been before the trust was organised. The dividends 
paid by the Standard Oil Company afford indirect support to 
this conclusion. Another case carefully investigated was that 
of refined sugar. Here it appeared that the margin between 
the price of the raw and the refined product fluctuated, but that, 
on the whole, the margin was reduced only as competition on 
the part of independent refiners became severe, and that as 
soon as a new combination was effected it was increased so as 
to afford larger profits to the Trust. Inconclusive though the 
above evidence is, its trend harmonises with what was to be 
expected on general principles. The trusts are organised for 
profit. One of the advantages claimed for them hy their pro- 
jnoters is control over prices. To the extent that they exercise 



49^ Trusts in the United States 

monopoly powers, self-interest will lead them to obey the prin- 
ciples governing monopoly price. When economies in produc- 
tion do really result from their form of organisation, they 
may find it advantageous not to raise prices, or even to lower 
them somewhat, in order to enlarge the volume of their sales, 
or to discourage competition. They will not, however, find 
it to their interest to lower prices to a point which deprives 
them entirely of monopoly profit, as competitive businesses are 
forced to do by the stress of competition. It may be concluded 
that the desire of the trusts is to maintain prices at a monopoly 
level, and that if they fail to do so it is because they have not 
the monopoly powers claimed for them by their organisers. 
What the effect of trusts generally upon prices may be is 
thus bound up with the question as to whether the trusts gen- 
erally succeed in actually controlling the branches of produc- 
tion in which they are organised, or whether they prove to be 
promoters' enterprises, which make little real difference in the 
competitive situation. It is quite clear from the earnings of 
some of the trusts that they have maintained prices comfort- 
ably above their expenses of production. The small earnings 
of others is equally eloquent proof of their failure to control 
the prices on which their success depends. 
The Con- § 275. Attempts to correct by means of legislation abuses 

OlSade^^ charged against the trusts have encountered a familiar obstacle 
to Legal in the United States — constitutional limitations on the legisla- 
o/^^ ^°° tive power. Under the American form of government con- 
Trusts trol over industrial enterprises is shared between the Federal 
and the State governments. The Constitution of the United 
States provides that Congress shall have control over com- 
merce between the States. In interpreting this clause, the 
Supreme Court has defined interstate commerce as " inter- 
course and traffic between the citizens or inhabitants of differ- 
ent States," including " not only the transportation of persons 
and property and the navigation of public waters for that 
purpose, but also the purchase, sale, and exchange of com- 
m.odities." It has further held that a failure on the part of 
Congress to regulate such intercourse and traffic in a particu- 
- lar way is to be taken as a declaration that such regulation is: 
deemed inexpedient, and that the States are therefore debarred 



The Common Law 499 

from interference. With equal definiteness the court has indi- 
cated what is not included in interstate commerce. It has said 
very clearly that the business of manufacturing, among other 
things, is not so included. As a consequence of the interstate 
commerce clause of the Federal Constitution, and the interpre- 
tation given it by the Supreme Court, a peculiar situation has 
arisen. Congress has been unable to exercise any efficient 
control over the trusts because their primary purpose is manu- 
facturing, and the interstate commerce in which they are 
engaged can be so carried on as to evade any prohibition yet 
devised, except such as would act as a serious check upon busi- 
ness generally. The States, on their side, have full power to 
control the trusts as manufacturing corporations, but may not 
interfere with any interstate commerce in which they are 
interested. Thus a State can prevent a corporation, organised 
as a trust, from carrying on manufacturing within its limits, 
but it cannot prevent a corporation having its plants in other 
States from shipping its goods to dealers within the first 
State and selling them, as the latter would be an interference 
with interstate commerce. Under these circumstances, effect- 
ive control of the trusts by the States can only be secured 
when all are ready to unite on similar laws having this object 
in view. Up to the present time little progress towards such 
united action appears to have been made. As an offset to the 
drastic anti-trust laws of some of the States, others and notably 
New Jersey, Delaware, and West Virginia, have deliberately 
liberalised their corporation lav/s so as to afford an asylum for 
the trusts for the sake of the large revenue that is to be 
obtained from them. Before considering the ways in which 
the country may hope to free itself from this dilemma, some- 
thing should be said of the common-law aspects of the ques- 
tion. 

Legal basis for a certain amount of control over the trusts The 
. - , . , , -r T 1 1 1 1 1 xi ^ Common 

IS found m tiie common law. It nas long been held that cer- i^^^^ 

tain " contracts in restraint of trade " are unenforceable at law 

and that " monopoly " itself is unlawful. Historically, " a 

contract in restraint of trade," in the legal sense, is a contract 

under which one party undertakes not to engage in a certain 

occupation under certain conditions. Not even all such con- 



500 Trusts in the United States 

tracts are unlawful, and but for the fact that American courts 
are inclined to stretch the phrase so as to include under it all 
contracts having monopoly as their object, the prohibition 
would have little significance for the trusts. The phrase 
" monopoly " has also, regarded historically, a restricted mean- 
ing. It denotes exclusive privileges confirmed by charter, or 
" legal monopoly." Here, again, American courts have shown 
a tendency to break away from the historical meaning of the 
word and to use it in its proper economic sense. Although 
there is some difference of opinion among judges as to the 
scope of the common-law prohibitions against contracts in 
restraint of trade and monopoly, the tendency seems clearly 
to be to extend these terms to the more objectionable practices 
of the trusts. Many go so far as to say that the common law 
furnishes a complete remedy for the trust problem so far as the 
trusts present a problem. 
Anti-trust § 276. Anti-trust acts were passed in Kansas, Maine, and 
Michigan in the year 1889. Congress followed in 1890 with 
the so-called " Sherman Anti-trust Law." Other State leg- 
islatures were not slow to fall in with the precedents so estab- 
lished, and by July i, 1902, twenty-seven of the Common- 
wealths had anti-trust acts on their statute books. Some of 
these, like the Illinois Act of 1893, have been declared 
unconstitutional on the ground that they impose undue re- 
straints on personal liberty. The Federal Anti-trust Act 
declares specifically that " every contract, combination in the 
form of a trust or otfi^rwise, or conspiracy, in restraint of 
trade or commerce among the several States, or with foreign 
nations," is illegal, and that " every person who shall monop- 
olise, or attempt to monopolise, or combine, or conspire with 
any other person or persons to monopolise any part of the 
trade or commerce among the several States or with foreign 
nations, shall be deemed guilty of a misdemeanour." This 
prohibition, although intended to prevent industrial combina- 
tions, has been so interpreted by the courts that it only in rare 
instances apphes to them. The original form of trust has been 
declared unlawful and suppressed and pooling contracts 
between competing manufacturers have been judged unen- 
forceable ; but all efforts to apply the Act to trusts organised as 



The Ohio Act of 1898 501 

separate corporations have thus far failed. As already stated, 
the courts define interstate commerce in such a way as to dis- 
tinguish sharply from manufacturing- and other industries 
those businesses concerned with the actual transportation and 
exchange of commodities. One result of this definition has 
been that the Act, which was aimed at the trusts, has been 
interpreted so as to apply chiefly to railroads and trade unions. 

The anti-trust acts of the States have been even more sweep- 
ing in their provisions. Thus the Ohio statute, which went 
into effect July i, 1898, and which has been widely copied, 
declares : 

" That a trust is a combination of capital, skill, or acts by The 
two or more persons, firms, partnerships, corporations, or q£ ^g g^ 
associations of persons, or of any two or more of them for 
either, any, or all of the following purposes : 

'"i. To create or carry out restrictions in trade or commerce. 

" 2. To limit or reduce the production, or increase, or reduce 
the price of merchandise or any commodity. 

" 3. To prevent competition in manufacture, making, trans- 
portation, sale, or purchase of merchandise, produce, or any 
commodity. 

" 4. To fix at any standard or figure, whereby its price to 
the public or consumer shall be in any manner controlled or 
established, any article or commodity of merchandise, produce, 
or commerce intended for sale, barter, use, or consumption in 
this State. 

" 5. To inake or enter into or execute or carry out any con- 
tracts, obligations or agreements of any kind or description, 
by which they shall bind or have bound themselves not to sell, 
dispose of or transport any article or any commodity, or an)'' 
article of trade, use, merchandise, commerce or consumption 
below a common standard figure or fixed value, or by which 
they shall agree in any manner to keep the price of such 
article, commodity or transportation at a fixed or graduated 
iigure, or by which they shall in any manner establish or settle 
the price of any article, com.modit}" or transportation between 
them or themselves and others, so as to directly or indirectly 
preclude a free and unrestricted competition among themselves, 
or any purchasers or consumers in the sale or transportation 



502 



Trusts in the United States 



Futility 
of Anti- 
trust Acts 



The 
Present 
Status of 
tlie Trusts 



of any such article or commodity, or by which they shall agree 
to pool, combine or directly or indirectly unite any interests 
that they may have connected with the sale or transportation of 
any such article or commodity, that its price might in any 
manner be affected. Every such trust as is defined herein is 
declared to be unlawful, against public policy and void." 

If this clause were literally interpreted, the act would, as 
has been well said, prohibit the most ordinary forms of busi- 
ness contracts. It proceeds on the assumption that combina- 
tion is contrary to public policy and attempts the impossible 
task of restoring the world to that stage of industrial develop- 
ment in which every producer was independent and a com- 
petitor of every other producer. Fortunately the courts have 
not attempted literal enforcement, but in their efforts to give 
this and similar acts a reasonable interpretation they have de- 
prived them of much of their significance. The experience of 
Texas, which succeeded in excluding the Standard Oil Com- 
pany as a corporation only to have one of the paid agents of 
the latter come in, nominally as a private individual, and secure 
a large interest in the Beaumont oil field, is fairly typical of 
that of other States. It is the sober conviction of most 
students of trust legislation that the attempt to suppress the 
trusts has proved futile. Armed with New Jersey charters, 
the trusts have been able, by fair means or foul, to maintain 
themselves in most markets against the most stringent anti- 
trust acts. In the light of this experience, the opinion is 
becoming general that the solution of the trust problem lies 
not in repression, but in regulation. 

§ 277. The period of prosperity which ushered in the trusts 
organised in 1898 and 1899 has continued since (July i, 1903) 
and this makes any expression of opinion in regard to their 
power to withstand adversity hazardous. One of the most 
interested observers of the movement, Mr. Charles M. Schwab, 
the first president of the United States Steel Corporation, 
has declared emphatically that the trust which attempts to 
realise profits by maintaining or advancing prices, instead of 
by so perfecting its methods of production that it can under- 
sell its competitors, is foredoomed to failure. His own com- 
bination gave point to this view during the 3^ears 1901 and 



Present Status of Trusts 503 

1902 by consistently opposing even such advances in the 
prices of its products as conditions seemed to warrant, 
and by taking other measures to prove to would-be competitors 
that cheap production, rather than monopoly, was what it 
aimed at. An example of the opposite policy has been afforded 
by the Copper Trust (the Amalgamated Copper Company), 
whose managers attempted to maintain the price of copper at 
the high level it attained during a period of active demand 
without much regard to the decreased consumption and in- 
creased production which naturally resulted. The sensational 
collapse of that Trust in December, 1901, seems to confirm 
Mr. Schwab's opinion. Of the older trusts, the American 
Sugar Refining Company seems far from master of the situa- 
tion in the sugar industry, the American Tobacco Company is 
encountering active competition, and even the Standard Oil 
Company finds its stock quoted (July i, 1903) some $200 under 
the highest price it has commanded. In nearly every branch 
of industry in which trusts have been organised, moreover, 
the number of independent producers has increased, and 
indications point to a recurrence of savage competition when 
the present period of prosperity comes to an end and depres- 
sion once more forces curtailment of production through the 
familiar process of elimination. It would be premature to 
conclude from these facts that the monopolistic powers of the 
trusts are on the wane. Most of them look wath slight con- 
cern on independent rivals so long as their own sales continue 
large and remunerative. When depression comes they vv^ill 
be tempted to adopt more aggressive tactics against their com- 
petitors, and only then can it be decided how far they still 
dominate the situation. 

An important forward step was taken by Congress in con- Reports 
nection with the creation (Act of February 14, 1903) of the De- Required 
partment of Commerce and Industry. The Bureau of Corpora- ^y 
tions, mcluded in this department, is charged ' to make diligent Govern- 
investigation into the organisation, conduct and management ^^'^^ 
of the business of any corporation, joint stock company, or 
corporate combination engaged in commerce among the sev- 
eral States or with foreign nations, excepting common car- 
riers, . . . and to gather such information and data as 



504 Trusts in the United States 

will enable the President of the United States to make recom- 
mendations to Congress for legislation for the regulation of 
such commerce." The Commissioner of Corporations, placed 
at the head of this bureau, is given the same ample powers in 
reference to the subpoenaing of witnesses, the examination of 
books, etc., as are enjoyed by the Interstate Commerce Com- 
mission. Finally, the publication of the information collected 
rests in the discretion of the President of the United States. 
It is too early to venture an opinion as to the success that is 
likely to attend this effort to exercise surveillance over the 
trusts. If they decline to furnish information on the ground 
that they are not engaged in interstate commerce, the issue will 
be squarely placed before the people of the United States, 
whether corporations which are national in the scope of their 
operations shall be permitted to escape national regulation. 
On the other hand, if they pursue the safer course and submit 
such reports as the Commissioner of Corporations requires, 
a fund of information will be collected withm a few years on 
the basis of which more positive efforts at regulation may 
confidently be undertaken. 
Plans for § 278. Under the system of divided powers created by the 

Legal Con- Federal Constitution, three possible ways of dealing with the 

trolover trusts appear to be open. The plan which, if feasible, would 

the Trusts 

be most certain to attain the desired object would be for Con- 
gress and the State legislatures to enact concurrent laws 
which would subject both the commercial and the manufac- 
turing aspects of these businesses to similar restrictions. As 
already suggested, little progress has as yet been made in 
this direction because of the diverse interests which the differ- 
ent States have in the trusts. It may be dismissed as imprac- 
ticable. A second plan for dealing with the trusts is to leave 
their regulation entirely to the States. Congress has power 
to control interstate commerce, and may, therefore, it is held, 
delegate such control to the State legislatures. If armed with 
full power over industrial combinations, the States, it is 
claimed, would be able to solve the trust problem independ- 
ently. This proposal is open to the same objection as the pre- 
ceding plan, and is also distinctly retrogressive. One of 
the chief reasons for assigning to Congress control over inter- 



Control by Federal Government 505 

state commerce was experience of the narrow and selfish poli- 
cies the States pursued so long as such control was left to 
them. To return to this condition of affairs, even with respect 
to the trusts, would be unendurable. On these grounds this 
plan, also, may be dismissed as inadequate. 

Alternative to the proposal to vest exclusive control of the Such 
trusts in the State legislatures is the third plan, that of giving should be 
such control to Congress. This might be accomplished, of Exercised 
course, by constitutional amendment, but it is generally agreed Federal 
that, at least for the present, an amendment having this object ^ov- 
in view would have little chance of enactment. In lieu of this 
direct method. Congress might obtain control over the trusts 
by forcing them to incorporate under a Federal statute in 
which were prescribed such conditions as were deemed desir- 
able. The powers under which Congress might legally com- 
pel the trusts to become national corporations are various. 
It might declare that no corporation without a Federal charter 
could engage in interstate commerce. Even the ingenuity of 
corporation lawyers would find it difficult to evade such 
a prohibition as regards some phases of the business in which 
every trust is engaged. If this policy seemed too drastic, it 
might impose a prohibitive tax upon the interstate traffic of 
State corporations, as was done to force State banks issuing 
notes to become national banks. Or it might make incorpora- 
tion under the Federal statute a condition to the enjoyment by 
a corporation of the protection of the patent laws, which is an 
important privilege to most of the trusts. Finally, it might 
proceed against State trusts as it proceeded against lotteries, 
by forbidding to them the use of the mails. It can hardly be 
doubted that through one or other of these measures all corpo- 
rations engaged in business which extended beyond the limits 
of a single State might be compelled to subject themselves to 
national regulation. The most serious objection to such reg- 
ulation is that when it was once entered upon it could not stop 
until control over business relations, which in the American 
scheme of government has been vested in the States, was 
transferred almost in its entirety to Congress. Such a large 
proportion of the business of the country is now conducted by 
corporations, and such a large proportion of the corporations 



^o6 Trusts in the United States 

extend their field of operations beyond the limits of a single 
State, that the poHcy considered would enormously increase 
the powers of Congress at the same time that it reduced to 
very low terms the powers of the States. Many persons shrink 
from such a radical departure from inherited traditions in 
reference to State rights and local self-government. Natural 
as is this feeling it seems destined to give way to the growing 
sense of national industrial solidarity and the conviction that 
businesses which are national in their scope must be regulated, 
if regulated at all, by national authority. Only in this way, 
it is believed, can the best interests of the whole people be 
safeguarded. This last plan of regulation appears, therefore, 
to be the only one that is both practicable and adequate to the 
situation. 
Voluntary Although not prepared to advocate compulsory incorpora- 
Incor- t^<^" under a Federal statute, many writers believe that the 

potation trusts should be given the opportunity of national incorpora- 
tion. In pursuance of this idea, Mr. F. J. Stimson, counsel of 
the Industrial Commission, has drawn up the first section of 
a proposed national act of incorporation, which reads as fol- 
lows : " Any corporation engaged in interstate commerce, or 
any number of citizens of the United States desirous of form- 
ing a corporation for the purpose of engaging in interstate 
commerce, either by transportation of persons or property or 
by other traffic or commerce among the States, may be organ- 
ised as a Federal corporation under this Act, and as such may 
sue or be impleaded in the Federal courts, and such corpora- 
tions shall not be subject to taxation under the laws of any 
State, except as to property actually within such State." Mr. 
Stimson believes that the privileges extended in the last clauses 
v/ould induce many of the trusts to submit themselves even to 
rather rigid regulations. This proposal offers a safe means 
of testing the readiness with which the trusts would subject 
themselves to reasonable regulations, and ought perhaps to be 
acted upon before any more radical step looking towards na- 
tional incorporation and national control is taken. 
The Regu- Assuming the trusts to be brought squarely under Congres- 
Needed sional control, as are the national banks and the interstate 
railways, we must consider the regulations which ought to be 



The Future of the Trusts 507 

applied to them. What these are was suggested in what was 

said of the illegitimate practices of the trusts. 

The most important reform would be to so supplement the Suppres- 

prohibitions of the Interstate Commerce Act that discrimina-^ Practices 

tions on. the part of the railroads in favour of the trusts would Leading to 

. Unfair 

altogether cease. This might be accomplished perhaps by com- 

making proof of the acceptance of such discrimination valid petition 
ground for the withdrawal of the charter of a Federal corpora- 
tion. The second prohibition should apply to the making of 
discriminating prices either as regards different localities or as 
regards different purchasers. The trusts might be required 
to submit their price lists to the Commissioner of Corpora- 
tions or some body similar to the Interstate Commerce Com- 
mission might be created to determine whether such prices 
were, comparatively speaking, just and reasonable, and there- 
fore lawful. Finally, contracts under which dealers were 
required to boycott other than trust-made goods should be 
prohibited, and machinery should be created for making such 
prohibition effective. If all of these measures were taken, 
unfair competition, which has too often characterised the prac- 
tices of the trusts in the past, might be suppressed. 

In addition to subjecting the trusts to control, as suggested Reform 
above, it would seem to be desirable for Congress to revise the ^j^ Trust 
tariff so as to subject monopolistic combinations to the whole- Products 
some stimulus of foreign competition. Such changes are espe- 
cially called for in the case of trusts which have secured con- 
trol of the important sources in the United States of the raw 
materials which they use, as have, for example, the United 
States Steel Corporation and the International P^per Com- 
pany. These businesses have many of the characteristics of 
natural monopolies so long as they are protected from foreign 
competition, and for this reason to withdraw the protection of 
which they are the beneficiaries would seem to be along the line 
of sound public policy. 

§ 279. The general uneasiness excited by the growth of the The 
trusts during the earlier years of the movement has, in the ^.j^^, Vpj^.^^g^^ 
light of experience, somewhat abated. It is now recognised 
that the trust form of organisation is adapted to rather a lim- 
ited number of businesses, and that only in a few cases can 



5o8 Trusts in the United States 

combination actually succeed for any length of time in sup- 
pressing competition. At the same time, the reasons for the 
success of those trusts which have succeeded are coming to be 
more generally understood and public opinion is being edu- 
cated to discriminate between the legitimate and illegitimate 
practices of the combinations. The future of the trusts in the 
United States depends very largely upon the promptness with 
which unfair methods of competition are prevented. If effect- 
ive measures are taken to prevent rate discriminations on the 
part of the transportation companies, and price discriminations 
and unfair contracts with retailers on the part of the trusts 
themselves, it is believed that the movement towards combina- 
tion will be checked, and that such combinations as continue 
to be effected will have back of them reasons not opposed to 
public policy. In the course of time some of the so-called 
industrial combinations are likely to evolve into out-and-out 
natural monopolies. The Anthracite Coal Combine appears 
already to have reached that stage of development. If the 
opinion of the officials of the company is to be accepted, the 
United States Steel Corporation is already virtually a natural 
monopoly as regards both its essential materials — iron ore and 
coking coal. Perhaps the International Paper Company is 
destined also to become a natural monopoly. In all such cases 
the public interest demands, not only publicity and fair dealing 
towards competitors as in the case of the trusts generally, but 
also power such as the Interstate Commerce Commission has, 
or ought to have, in connection with railway rates, to insist on 
just and reasonable prices. 
Power of The most effective weapon wielded by the public for dealing 

ion'^a '"" ^^*^ *^^ trusts, as with other actual and potential monopolies. 
Weapon is the consumer's power to substitute other goods for 
Controlling those which the trusts enhance in price. As consumption and 
Monopolies processes of production become more varied in their range, this 
power acquires wider scope. It already effectually precludes 
excessive profits to any very large number of businesses and 
limits the monopoly problem to those few services and com- 
modities which remain indispensable to civilised existence, such 
as transportation facilities, coal, iron, petroleum, salt, sugar, etc. 
As time goes on, invention and discovery may still further 



Consumers' Weapon against Trusts 509 

narrow the list of such articles and services, but probably never 
to such an extent as to make the monopoly problem one of 
little importance to the economist. 

REFERENCES FOR COLLATERAL READING 

* Jenks, The Trust Problem; Report of United States Industrial 
Commission, Vols. I., II., XIII., and XVIII.; *Meade, Trust Finance; 
von Halle, Trusts or Industrial Combinations in the United States; 
*Clark, Control of Trusts; Gunton, Trusts and the VvibWc; Nettleton, 
Trusts or Competition; Report of Chicago Conference on Trusts 
. (The Civic Federation. 1899); Lloyd, Wealth against Common" 
wealth; Tarbell, The History of the Standard Oil Company; 
Montague^ The Standard Oil Company; ^Fetter, Principles of 
Economics, Chaps. 34 and 35; Ripley, Trusts, Pools and Corners. 



CHAPTER XXVI 



PLANS OF ECONOMIC REFORM 



Four 
Plans of 
Economic 
Reform 



Profit- 
Sharing 



Objections 
to the 
Sliding- 
scale 
System 



§ 280. The industrial system which has been described and 
analysed in the preceding chapters leaves much to be desired. 
We have now to consider different plans that have been sug- 
gested for its reform and to decide how far they are practi- 
cable. Because of limitations of space, we must confine our 
survey to the four proposals that seem, at the present time, to 
merit most serious consideration, that is, profit-sharing, labour 
copartnership, land nationalisation, and socialism. 

§281. One criticism urged against the present industrial 
system is that workmen, upon whose labour and fidelity the 
success of business undertakings so largely depends, receive no 
share of profits. Wages constitute usually their sole compensa- 
tion, whether the entrepreneur who employs them is reaping 
large gains or incurring losses. To give workmen a keener 
interest in their work various expedients have been devised, 
all of which may be described as forms of profit-sharing. 

One of the simplest methods of profit-sharing is that which 
causes wages to vary on a sliding scale with the price of the 
product. This has long been common in the mining and iron 
and steel industries of Great Britain, and is not unusual in the 
same industries in the United States. It is, however, open to 
grave objections, unless standard rates of wages are estab- 
lished as a minimum below which earnings are not to be 
depressed, no matter how low the price of the product may be- 
come. In every branch of industry prices are subject to varia- 
tion and tend at times to fall below the normal expenses of pro- 
duction. The force which is relied upon to restore them at 
such periods is the unwillingness of entrepreneurs to continue 
production at a loss. Under the sliding-scale system, wages, a 
principal item among the expenses of production, fall as prices 
fall. The consequence may be that entrepreneurs can still 

510 



Objections to Sharing Losses 511 

produce at a profit even when the price is too low to afford a 
fair return to wage-earners. Under such circumstances the 
force relied upon to restore prices is removed and they may for 
some time remain below the level which permits a fair com- 
petitive return to all parties. Of course, workmen will 
gradually withdraw from such poorly paid employments, and 
in this way the equilibrium may in time be restored, but it is 
also possible that in the interval whole groups may suffer a 
permanent lowering of their earning capacities and standards 
of living. A sliding-scale method of remuneration which has 
not as its basis minimum wages is thus a menace to the per- 
manent well-being of the wage-earning class. Another ob- 
jection to the sliding scale is that it assumes a constancy of 
relation between the price of the product and the amount of 
the profits that does not in fact exist. Thus, anthracite coal- 
mine owners in the United States objected to the application 
of the system to that industry by the award of the Strike Com- 
mission already referred to, on the ground that their expenses 
of production were growing each year heavier as the mines 
grew deeper, and that higher prices in the future would add 
nothing to their profits and consequently give rise to no fund 
to be shared with their emplo3^ees. Whether this position was 
justified in this particular case or not, there can be no doubt 
that changes in prices are too inaccurate indices of changes in 
profits to permit the extension of the sliding-scale system to 
many branches of business. 

A less objectionable, if more complex, method of sharing Objections 
profits is for the entrepreneur to appraise his own services as LosseY^^^ 
worth a certain wages of management and to agree to distrib- 
ute all profits above this sum to his employees — including him- 
self as salaried manager — in proportion to the wages which 
they respectively receive. Such a distribution of profits, if 
fairly carried out, offers the highest incentive to all employees 
to contribute their maximum to the success of the business. 
If anything, it errs on the side of being overgenerous to work- 
men, since they are guaranteed their wages whether there are 
any profits to distribute or not, whereas the wages of man- 
agement of the entrepreneur can be paid only when profits 
equal at least to this amount have been realised. To obviate 



512 



Plans of Economic Reform 



other 
Plans of 
Profit- 
Sharing 



this difficulty it has sometimes been attempted to scale down 
wages proportionately when losses result in businesses v/hich 
have adopted the practice of sharing profits. Logical as such 
a plan may seem, it is open to the fundamental objection that 
it makes workmen suffer for the mistakes of their employers. 
So long as the former have no voice in the management of the 
business in which they are engaged, they may rightly demand 
standard wages. If the employer is willing to offer them in 
addition a share of his profits, they should and usually will 
show their appreciation by attending more carefully to his 
interests. They should not be asked to share losses, however, 
as this would interfere with that elimination of unfit employers 
upon which progress so largely depends. 

Besides the plans for sharing profits described above, there 
are dozens of others of varying degrees of complexity. In 
mercantile trade it is not unusual to compensate salesmen with 
a certain percentage of their gross sales in addition to their 
salaries. Corporations are increasingly in the habit of paying 
bonuses to their employees out of the profits of each year's 
business. Several of them have introduced elaborate plans, 
such as that of the United States Steel Corporation, for selling 
stock to their employees on favourable terms and paying them 
a premium in addition to the usual dividend on condition that 
they retain the stock and with it an interest in the success of 
the enterprise. Some of these plans have been adopted upon 
humanitarian grounds, but most of them are simply enlight- 
ened expedients for increasing the interest which hired work- 
men feel in the quality and quantity of their work. Modern 
business is a vast system of co-operation, and the principal 
criticism, from the point of view of production, that is to be 
urged against it is that the co-operation is so often grudging 
and half-hearted. Profit-sharing is a device for bridging over 
the gulf between employers and employees by making the in- 
comes of both depend directly upon the amount of profits. 
When adopted as a supplement to the payment of wages at 
standard rates it merits only commendation. It increases the 
productiveness of labour by giving workmen a livelier interest 
in the results of their toil. It adds to wages and thus permits 
workmen to attain to higher standards of living at the same 



Labour Copartnership 513 

time that it facilitates the accumulation by them of capital. 
Finally, it renders the relations between employers and em- 
ployees more cordial, and in this way prevents strikes and lock- 
outs. Those who object to profit-sharing do so on the ground 
that it is a mere palliative, when what is needed is a radical 
change in the present industrial system. To judge of the 
soundness of this criticism we must pass to a consideration of 
other plans of economic reform. 

§ 282. Labour copartnership, or " co-operation," as it is fre- Labour O- 
quently styled, goes a step further than profit-sharing by mak- si^^p^®*"' 
ing workmen partners in the businesses in which they are 
employed. It is a plan for dispensing with the services of the 
entrepreneur, or the risk-taker, and substituting for him a 
group of partners who both direct and carry out the undertak- 
ings in which they are engaged. Up to the present time labour 
copartnership has succeeded best in connection with trade, and 
especially retail trade. A brief description of its development 
in Great Britain, where it has enjoyed widest extension, will 
serve to introduce a discussion of its strong and weak features. 

Successful labour copartnership in England may be said to In Great 
date from the year 1844, when the famous Rochdale co-oper- 
tive store was founded by the twenty-eight " Rochdale pio- 
neers." As the same form of organisation has been adopted 
by other co-operative stores in all parts of Great Britain since, 
a brief description of this store may be given. The needed 
capital was obtained by the issue of £1 shares to subscribing 
members, and on this investment 5 per cent, interest was 
regularly paid before profits were divided. Anyone might 
become an ordinary member on the payment of one shilling 
and was then entitled to trade at the store and receive a share 
of the profits proportionate to the amount of his purchases. 
The prices charged were about the same as those asked for 
similar goods in other stores and cash payments were required. 
Thus the advantage to the purchaser was the receipt every 
quarter of his share of the profits and the assurance 
that he was not being cheated in reference either to the 
quality of the goods bought or their prices. From a very 
small beginning the Rochdale store has grown to be a great 
enterprise. Within thirty years the number of members 



BH 



Plans of Economic Reform 



The 

English Co- 
operative 
Wholesale 
Society 



The 

Scottish 
Society 



increased to nearly 8000, the capital to nearly £200,000, the 
gross business to nearly £300,000 and the annual profits to 
over £40,000. The progress since 1874 has been continuous, 
and several manufacturing enterprises have been started and 
are now run in connection with the Store and its branches^ 
There has been but one flaw in this development, and that is 
the abandonment by the Society of any pretence of dividing 
profits with employees. Its relations with the latter are like 
those of an ordinary business corporation, the co-operative 
feature being limited strictly to customers. 

The remarkable success of co-operative retail stores 
modelled after the Rochdale experiment, emboldened the 
leaders of the movement to establish in 1864 the English 
Co-operative Wholesale Society for the purpose of buying 
jointly for retail co-operative stores on more favourable terms 
than they could secure by dealing with ordinary wholesalers 
and jobbers. The Wholesale was a success from the very 
start. By 1901 it had a membership of over 1000 retail 
societies and a capital of nearly £2,500,000, while its sales 
amounted to more than £7,500,000 and its profits to nearly 
£335,000. From buying its goods by wholesale from other 
manufacturers the Society soon passed to manufacturing for 
itself upon an extensive scale. It is now engaged in the 
manufacture of biscuits, cocoa, butter, preserves, sweets, 
boots and shoes, soap, candles, woollen goods, ready-made 
clothing, flour, lard, furniture, shirts, mantles, and undercloth- 
ing, and it does its own printing and that of many of its mem- 
bers. In its management of its manufacturing establishments, 
it, too, has pursued the policy of the ordinary business corpora- 
tion. It pays good wages, but it accords to its employees 
neither voice in the direction of the enterprises in which they 
are engaged nor share in the profits. This fact must not be 
overlooked when the success of the English Wholesale Society 
is cited as proof of the possibilities of labour copartnership. 

In 1868 The Scottish Co-operative Wholesale Society was 
launched on the model of its English predecessor. Its man- 
agers two years later introduced a profit-sharing feature, 
which has been retained ever since and to which the superior 
success of the Scottish Society is by some attributed. In 190 1 



Labour Copartnership in the United States 515 

the Scottish Society had over 600 members and a capital of 
over £1,500,000; its sales aggregated over £5,700,000 and its 
profits nearly £250,000. When it is remembered that the 
population of Scotland is less than one-seventh that of Eng- 
land the significance of these figures is evident. 

In addition to the two wholesale societies described there Present 
were in Great Britain in 1901, 1462 co-operative retail societies, Labour 
or ** stores," with a membership of nearly 1,800,000, a share Copartner- 
capital of £22,000,000 and profits aggregating over £8,260,000. ^ 
Besides these co-operative trading societies there were a num- 
ber of co-operative productive associations in England and 
Scotland in that year. Of these, 136 were manufacturing and 
30 were agricultural. The combined membership of both was 
less than 35,000, however, and the profits on the year's busi- 
ness were only £187,000. 

In contrast with this remarkable development of labour co- Reasons 

i"OT* T53.CK- 

partnership in Great Britain there are in the United States wardness 

but a few successful co-operative experiments. In mining of the 
... , • r r 1 • United 

districts and in factory towns successful co-operative stores states 

are not unknown and in farming regions, especially in the 
Middle West, co-operative creameries are found, but taken 
altogether these experiments affect as yet but a small part of 
the business that is regularly carried on in the country. The 
reasons for this slight development are to be sought partly in 
the peculiar industrial conditions of the United States and 
partly in the circumstances that have confined the spread of 
labour copartnership, even in Great Britain, to trade and a few 
branches of manufacturing. Co-operative activity implies a 
certain degree of homogeneity of thought and feeling on the 
part of a population and this is, for obvious reasons, less de- 
veloped in the United States than in the older countries of 
Europe. It also requires a willingness to incur a good deal of 
trouble for the sake of the petty economies that are to be real- 
ised from dispensing with the middleman in business, and 
American workmen have not yet reached the point when they 
are willing to take this trouble. As time goes on local and 
national obstacles to the progress of the movement will give 
way, but there will remain the circumstances that everywhere 
limit labour copartnership to a few industries. 



Reasons 

for Success , . . ^ • i i 

and Failure they render is oi a very simple character, 

oiCo-oper- their customers. 

ative Ex- 
periments 



516 Plans of Economic Reform 

Co-operative stores are abk to succeed because the service 

They are sure of 
They may insist on cash payments and in 
this way avoid losses through unwise extensions of credit. 
They need little initial capital and can usually obtain this 
without difficulty from the savings of workmen themselves. 
Through the growth of co-operation in retail trade, the " co- 
operative wholesale " is made possible, and through it in turn 
certain co-operative manufacturing industries may be devel- 
oped. The English Co-operative Wholesale Society has, as 
already remarked, failed to apply the principle of labour co- 
partnership to its relations with the employees in its manu- 
facturing departments, and the reason for its policy are not far 
to seek. Successful manufacturing requires intelligent and 
progressive management and large capital. Workmen rarely 
appreciate the importance of the first or are in a position to 
supply the second. The consequence is that only in excep- 
tional cases does labour copartnership succeed in manufactur- 
ing. When the capital is forthcoming, there is almost certain 
to be before long a disagreement in regard to the business 
management. As submission to the judgment of the salaried 
manager must, in the nature of the case, be entirely voluntary, 
disagreement is only too apt to lead to insubordination and dis- 
ruption. Even when capable managers are secured, therefore, 
efficient control of a labour copartnership can hardly be main- 
tained for any great length of time. But the chances are 
strongly against securing efficient managers because the work- 
men partners usually object to paying sufficiently high salaries. 
The common view was tersely expressed at an English co- 
operative congress by a delegate who declared he had never 
yet seen a man whose services were worth £500 a year. 
With such an opinion of the value of business organisation 
and management labour copartners must soon be worsted 
in competition with independent entrepreneurs. The diffi- 
culties in the way of securing capital for enterprises which 
require — as do many branches of manufacturing — investments 
of more than $i(X)o for each employee are obvious. Few 
workmen have so much to invest, and those who have are 
likely to be particularly timid about risking it in untried fields. 



Land Nationalisation 5^7 

On the other hand, few capitalists care to lend their savings 

to labour copartners. 

Labour copartnership is an admirable substitute for the The^^^ ^^ 
competitive system whenever and wherever it can succeed. It Labour Co- 
appeals to higher motives than mere self-interest and its in- partnership 
fluence upon the character of those who engage in it is broad- 
€ning and ennobling. As time goes on its extension to ever 
wider fields may be confidently hoped for, but such exten- 
sion must necessarily be gradual. All of the conditions upon 
which its successful operation depends— a fuller appreciation 
by workmen of the value of the services of business managers 
and organisers, a willingness on their part to take orders from 
bosses of their own choosing, and finally an accumulation by 
them of capital— must be of slow growth. This does not lessen 
in the least the importance of labour copartnership as a plan 
of economic reform, but it shows the extent to which the 
present industrial system is adjusted to the character and at- 
tainments of the average man of the present day and em- 
phasises the truth that it can be displaced only as the average 
man is raised to a higher plane of thought, feeling, and 
efficiencv. 

§ 283.' Profit-sharing and labour copartnership are plans of ^and^^^,^ 
reform that may be and have been introduced without any gation 
change in law or in the functions of the state. Their ex- 
tension depends upon purely voluntary methods, and their suc- 
cess may be gauged by their ability to hold their own in com- 
petition with other forms of business organisation. Quite 
different is land nationalisation, the plan of reform now to be 
considered, since it proposes a fundamental change in the 
' present industrial system, the abolition of private property in 
land. The grounds for this proposal have already been sug- 
gested in the analysis of production presented in earlier chap- 
ters. As there shown, one of the factors in the creation of 
wealth is land and the natural powers associated with it. 
These are, broadly speaking, gifts of nature to man whose 
services contribute a share to the value of the product dis- 
tinguishable in thought from the shares due to labour and to 
capital. In return for these services the income which we 
have called rent is paid to landowners. In the view of ad- 



5i8 



Plans of Economic Reform 



Advan- 
tages of 
Private 
Property 
in Land 
in Great 
Britain 



In the 

United 

States 



vocates of land nationalisation this income is " unearned " by 
the private landowners who receive it and ought in justice to 
be diverted to the use of the whole community, either by means 
of taxation or through the outright confiscation of land by the 
Government. In order to determine the merits of this plan of 
reform we must consider the grounds which have, to the minds 
of thoughtful persons, justified the system of private prop- 
erty in land for so many centuries and the results that would 
be likely to follow such a radical change as that proposed. 

Private property in land was adopted in Great Britain aftei 
centuries of experience of a kind of communal ownership. 
The latter was found to be deadening to enterprise and prog- 
ress because it compelled the adoption of uniform methods of 
cultivation by the members of each rural community and be- 
cause it offered no adequate incentive to those large plans of 
improvement, such as the draining of marshes and the intro- 
duction of artificial fertilisers, to which English agriculture 
has owed so m.uch. It is true that the system has had its dark 
side in that the transition to it afforded an opportunity for 
much fraud and injustice, and in that it has resulted in the for- 
mation of great hereditary estates owned by absentee land- 
lords. Even with these drawbacks, however, it is believed 
that the introduction of private property in land has resulted 
in national gain, and if measures had been taken, as they might 
easily have been, to prevent these evil results, the beneficence 
of the change would not admit of question. 

Even without the precedents established by European coun- 
tries, it is highly probable that the early settlers of America 
wovild have adopted private property in land as the only sys- 
tem adapted to the conditions of a new country. To attract 
colonists it was necessary to offer them every inducement. 
Guaranteeing them in the ownership of such land as they 
were able to reclaim from the wilderness and defend from the 
Indians seemed a small enough return for the hardships and 
privations which they were required to endure. Of course 
land was also secured at times on terms that had little regard 
to the general interest, but, on the whole, the results of the sys- 
tem have abundantly justified it. Even at the present time, 
the best sense of American statesmen cordially approves the 



The Situation in the United States 519 

principle of the Homestead Act, under which settlers may 
secure limited tracts of land from the Government practically 
free of charge. The liberal land policy which the country 
adopted and has adhered to from the earliest period of settle- 
ment has been a chief factor in the rapid settlement of the 
American continent. Unwise as it may have been in some of 
its details, it can hardly be doubted that it has been, in its main 
features, sound and beneficent. 

§ 284. An historical justification of private property in land The 
is quite a different thing from a demonstration that the sys- problem 
tem must endure until the end of time. At some period it is 
quite certain that this system, like others that preceded it, will 
cease to be adapted to industrial conditions and will need to 
be modified, if the best interests of society are still to be 
served. We have nov/ to weigh the truth of the claim of 
advocates of land nationalisation that this period has already 
come for the countries of the Western World. 

The principal advantages of private property in land are Evils of 
realised only when the owner is at the same time the occupier ^osentee 
or cultivator. Under these conditions self-interest insures in lordism 
most cases the most economical and progressive utilisation of 
the land attainable. When, on the other hand, the owner is 
an absentee landlord, who leases the land to the occupier or 
cultivator, it can make little difference whether he is the ad- 
ministrator of a private estate or an official of a well-organised 
government. In either case the actual use made of the land 
must depend upon the efficiency of the lessor and the terms 
of the lease. It follows that the suitability of the present sys- 
tem of private property in land to present conditions hinges 
upon the question whether absentee landlordism both in town 
and country is coming to be the rule or whether this condi- 
tion is still exceptional. 

Space will not permit an exhaustive analysis of the actual T'^® . 
situation even in the United States, but a few facts may be in the 
mentioned as proof that, in this country, at least, absentee land- U^^^^^ 
lordism is still exceptional and occupation or cultivation by 
the owner the rule. According to the census of 1890, 72 per 
cent, of the 4,565,000 separate farms in the country in that year 
were operated by their owners. The percentage had decreased 



520 Plans of Economic Reform 

to 65 in 1900, but owing chiefly to an extension in the Southern 
States of the system of cultivation '* on shares " which has the 
one advantage that it insures the owner's continued interest 
in the methods of cultivation practised by the tenant. 

In towns and cities the situation is far less favourable to the 
present system of private property in land, although few 
exact figures in reference to it are available. Moreover there 
is reason to think that, especially in large cities, absentee land- 
lordism is becoming more and more the rule, for the simple 
reason that more and more people are coming to live in 
tenement and apartment houses.* If this is the case, there 
may be good ground for the contention that the system of 
private property in land is ceasing to serve any useful purpose 
in cities which the system of public ownership would not serve 
as well and that the time is ripe for a gradual transition to the 
latter. 
The § 285. The plan for diverting the income we have styled 

rent from private landowners to the Government that has at- 
tracted most attention in the United States is called by its ad- 
vocates " the single tax," a name given it by its author, Mr. 
Henry George, in his widely read book Progress and Pov- 
erty. Before we consider the practical aspects of the land 
question a few words should be said about this work and its 
proposal. Mr. George's avowed purpose in writing Prog- 
ress and Poverty was " to seek the law which associates 
poverty with progress and increases want with advancing 
wealth," and in it he attempts to prove that this law results 
from the institution of private property in land which, he 
believes, causes the benefits of progress to redound to the ex- 
clusive advantage of landowners. Diverting these benefits 
to the whole community by means of a " single tax " on land 
rent would, he thinks, " raise Avages, increase the earnings of 
capital, extirpate pauperism, abolish poverty, give remunera- 
tive employment to whoever wishes it, afford free scope to 
human powers, lessen crimes, elevate morals and taste and in- 
telligence, purify government, and carry civilisation to yet 
nobler heights." The argument by which he arrives at this 

* Already in New York City but one family in nine owns its place of 
residence. 



Objections to the Single Tax 521 

gratifying conclusion is far too elaborate to reproduce in brief 
compai^s, and this is the less necessary because there is no evi- 
dence of the truth of the law for which he seeks an explana- 
tion and whose existence is vital to his whole contention. 
Poverty has undoubtedly persisted in spite of progress, but 
that it has increased with progress is directly contrary to the 
fact. Equally unwarranted is the assumption on which his 
conclusion rests that every improvement in productive power 
tends to increase rents. This could only be the case if the 
population of each country had an absolutely rigid standard 
of living and responded to every improvement by multiplying 
tintil the margin of cultivation was lowered to a point at 
which wages were no higher than before. If such were the 
fact, the true explanation of the increase in rent and the per- 
sistence of poverty would have to be sought not in the 
appropriation of rent by landlords, but in the unj^ogressive 
character of the people generally, and it is not at all clear 
how the situation would be helped materially if all rent went 
to the Government and if all other taxes than that on rent 
were abolished. 

Henry George's extreme claims, both as to the need for a 
radical remedy for present economic evils and as to the bene- 
fits that would result from his " single tax," seem extravagant, 
even to the point of absurdity, but his proposal ought not 
to be dismissed on these merely negative grounds. The influ- 
ence which Progress and Poverty has exerted over its hundreds 
of thousands of readers has been due, not to the novelty or 
profundity of its argument, but to the sincere desire to benefit 
humanity which so clearly inspired the author in its composi- 
tion. The plan suggested should be considered in no meaner 
spirit, that is, with sole reference to its social utility. 

§ 286. The first objection to the " single tax " refers to the Objections 
contention of its advocates that it would prove adequate to the ^c:^^^^ ^ 
fiscal needs of every community at every stage of its indus- It is 
trial development. The point v,^ould be of minor importance iQadeq-aate 
did it not illustrate how largely belief in the " single tax " 
rests on faith rather than upon reason. As shown in pre- 
vious chapters the amount of rent depends upon differences in 
the productiveness of different pieces of land and the location. 



522 



Plans of Economic Reform 



It Would 
Involve 

V.'holesale 

Confis- 
cation 



of the margin of cultivation. In a prairie region differences 
in fertility are much less marked than in a hilly country. 
Thus, in equally populous areas in different parts of the 
United States, great differences are found in the size of the 
aggregate rent fund. The needs of such regions for revenue 
for courts, jails, roads, common schools, etc., have little rela- 
tion to these differences. Moreover the more intelligent and 
the more social the population becomes the keener will be its 
appreciation of common needs and the larger the fiscal require- 
ments of the government which ministers to such needs, but 
these again have no connection with the size of the rent fund. 
It follows that the need for public revenue is little^ if at all, 
related to the circumstances that determine the size of the rent 
fund and if the appropriation of that fund by means of taxa- 
tion should, by chance, just pay the expenses of government 
at one time, it would be very certain to fall short of or to exceed 
the amount needed for this purpose at a subsequent period. 
The contention that a tax on rent would by itself meet all of 
the requirements of government at all times may thus be dis- 
missed as visionary. Even could it be shown to be an excellent 
tax, to depend upon it as the single tax would be the height 
of folly. 

The next objection is more fundamental and applies to all 
plans involving the diversion of land or the income it affords 
to the common benefit. Such policies amount to confiscation 
and can only be justified on the ground that they are abso- 
lutely essential to general well-being. For centuries the law 
has permitted the private ownership and enjoyment of land. 
Pieces of land have changed hands on the average dozens 
of times in the United States, and present owners have in 
most cases acquired them not as free gifts of nature nor 
as grants from the Government, but by paying for them, 
just as they have had to pay for other species of property. 
To deprive them of their lands, or what amounts to the 
same thing, of the income which these lands afford, would be 
to commit a monstrous piece of injustice. Such injustice 
might possibly be countenanced if there were any rational 
ground for sharing Henry George's expectations as to the 
results of such a policy, but in the absence of such ground it 



Conclusions as to the Single Tax 523 

must be condemned in unqualified terms. It is preposterous 
to suppose that an era o£ social justice may be ushered in by 
the deliberate disregard of rights which the law has so long 
held sacred. Even though we grant that property in land 
originated in theft — a proposition which is to say the least de- 
batable — we must protest against the notion that the thefts 
of long ago are to be corrected by the forcible spoliation of 
present owners, whose property has in the majority of in- 
stances been honestly bought and paid for. A state which 
would thus overturn an established institution, and confiscate 
by wholesale the property of its citizens, would lose the con- 
iidence of those citizens and be reduced to a condition of 
anarchy bordering on civil war. Any increase in public revenue 
or reduction in other forms of taxation so secured would be 
bought at far too high a price. 

The third and last objection to the single tax is adminis- Impossible 
trative in character. Although the rent of land may be dis- i^^gf"^"^^^" 
tinguished in thought from interest on capital invested in the 
land, it is often impossible to distinguish it in practice. As 
already pointed out, permanent improvements to land, such as 
draining marshes, or filling in hollow places or levelling down 
elevations to adapt lots for building purposes, become indis- 
tinguishable from the land itself. For the government to ap- 
propriate the entire income from improved land would be for 
it to place a ban upon further improvements. For it to ap- 
propriate only the true economic rent would, in many cases, 
be impossible, as there is no means of calculating exactly the 
amount of that rent. Thus the carrying out of the single-tax 
programme is confronted by serious practical difficulties. 

For the reasons discussed, and others of less importance, the Conclusions 
single-tax programme, as originally formulated by Henry sf^gle Tax 
George, has not received the endorsement even of all of his 
avowed followers. The latter are more and more concerned 
with the practical aspects of tax reform and are rendering a 
valuable service by forcing upon public attention the evils in 
the present situation. The single-tax agitation has thus be- 
come a part of the broader movement for tax reform, the dis- 
cussion of which must be deferred to Chapter XXVIII. 

§ 287. The last and most radical plan of economic reform Socialism 



524 



Plans of Economic Reform 



Com- 
munism 



Plans 
for 

Realising 
Socialism 



is what we have designated as " sociaHsm." As the term is 
here used, it refers to the proposal to reorganise industrial 
society by transferring to the state, or its agent, the govern- 
ment, control over land and the instruments of productions^ 
which we have called capital goods, and by confining private 
property to the things which minister directly to the satisfac- 
tion of wants, that is, consumers' goods. As owner of all land 
and capital the state would also be director of all industrial 
undertakings'. All business managers and workmen would 
become government officials, employed in government enter- 
prises and remunerated according to some plan prescribed by 
the government. Private initiative and competition in industry 
would be superseded by state initiative directed by the special 
departments of the government entrusted with the manage- 
ment of industrial affairs. 

Although agreeing on these main points, socialists differ 
widely as to the details of the industrial system which they 
propose and also as to the means by which it is to be realised. 
One group, which we may conveniently designate as " com- 
munists," advocates an equal per capita division of the prod- 
ucts of industry, the latter being valued in proportion to 
the units of labour time involved in their production. Another 
group recognises that the needs of dift"erent individuals differ 
as widely as do productive capacities and defines as its 
ideal " production by each according to his capacity and dis- 
tribution to each according to his need." Still others con- 
tent themselves with the optimistic prediction that under 
socialism there will be a superabundance of goods of all kinds 
and that the problem of distribution will consequently offer no 
difficulties. 

As regards means of realising socialism, one group, which 
we may designate as the revolutionary socialists, looks forward 
to a general uprising on the part of the masses who will first 
obtain control of the government, then confiscate all land 
and capital goods, and finally inaugurate the system of state- 
directed industry. Another group condemns revolutionary 
measures and looks forward to a gradual transition to sociaI« 
ism through a step-by-step extension of the functions of 
government, to be defended at each stage not by any pre- 



The Advantages of Socialism 525 

conceived preference for socialism, but by the exigencies of 
each situation. Still another group looks for the new system 
as the result of a revolutionary, but entirely voluntary change 
approved by all classes, because the competitive system will 
have become intolerable. These differences as regards both 
the ideal in view and the means to its attainment render diffi- 
cult any general characterisation or criticism of socialism as 
a plan of economic reform. In what follows we must content 
ourselves with reviewing some of the advantages claimed for 
socialism and some of the practical difficulties which oppose 
its introduction. 

§ 288. The advantages claimed for socialism are both eco- Economic 
nomic and moral. In contrast with the present system of tao-ls^f 
production, which is wasteful and haphazard, it contemplates Socialism 
a system under which the economic needs of the community 
will be accurately estimated and the available land, labour, and 
capital carefully apportioned, so that just the quantity of 
each kind of good required will be produced. The duplica- 
tion of plants and the excessive production of particular goods, 
now so common, will be avoided, the expenses of advertising 
and competitive selling will be saved, and finally the produc- 
tion of goods that are harmful rather than beneficial to those 
who consume them will be suspended. As a consequence of 
these improvements on present practices there will be, it is 
claimed, an immense sa\ ing of productive power, which may be 
utilised either to add largely to the volume of goods produced, 
to shorten the hours of labour, or to combine both advantages 
to the benefit of mankind both in its consuming and in its 
producing capacity. 

The moral advantages claimed for socialism are even more Moral Ad- 
noteworthy. Instead of depending upon self-interest as a spur '^'^ ^^ 
to industrial activity, socialism relies upon the love of activity 
for its own sake, the desire to contribute to the common good, 
the sense of duty in the performance of tasks that are largely 
voluntary, and the ambition to win social esteem and social 
distinction through conspicuous social service. It is labour 
copartnership extended and systematised to embrace the whole 
industrial field and has the same moral advantages over com- 
petition as has conscious co-operation. Under socialism all 



526 



Plans of Economic Reform 



Objections 

to 

Socialism 



men would live literally as brothers, sharing in the common 
toil, and enjoying each his portion of the fruits of that toil. 

§ 289. It is unpleasant to contrast the socialistic dream as it 
is unfolded, for example, in such a work as Bellamy's Look- 
ing Backward with the hard facts of life and of human nature, 
but no less drastic a course can serve to present in their true 
light the obstacles in the way of the realisation of socialism. 
Men as they are are fond of activity for its own sake, to be 
sure, but not usually of the sort of activity for which they are 
best fitted in their role as producers of wealth. If this motive 
were alone to be depended upon, not ten in a hundred v/ould 
be likely to declare themselves in favour of useful forms of 
activity. The other ninety would content themselves with 
pure play, finding their satisfaction in it partly, it must be 
confessed, because it is entirely dissociated from any pro- 
ductive result. The desire to contribute to the common good 
would, doubtless, hold a larger number to the tasks best suited 
to their capacities, but the slight extent to which this desire is 
developed must impress anyone who observes the conduct of 
people towards forms of public property, like parks and mon- 
uments. The horizon of the average man is still painfully 
limited and the sacrifices he is willing to make for the vague 
public beyond his family and immediate circle of friends is 
small, except in moments of excitement when his social con- 
sciousness is aroused out of its habitual lethargy. The sense 
of duty is also a motive that could not safely be relied upon to 
hold many men to the monotonous daily round which is neces- 
sary to efficient production in many, if not in most departments 
of industry. Finally, the desire for social esteem and social 
distinction, which is certainly strong in the average man, is 
neutralised as a motive to industrial activity because, as a 
matter of fact, public opinion is very undiscriminating in its 
judgments. It rarely accords applause where and at the time 
applause is due, and it is very apt to reward with its approval 
quite unworthy candidates for its recognition. Some system 
of graded honours, like decorations or titles, might be devised, 
similar to those already in vogue to reward men for signal 
services on the field of battle, but that these would hold the 
rank and file of the industrial army to their tasks in the ab- 



Difficulties in the Way of Socialism 5^7 

sence of other incentives will hardly be claimed by anyone. 
It is believed that these considerations admit of but one 
conclusion, namely, that the motives to industrial activity on 
which socialism relies are all too weak and that compulsion 
would have to be called in to supplement them if the system 
was to be put into practical operation. But compulsion is 
tyranny, and whether practised by a selfish despot or by an 
enlightened majority seeking only the general good, must 
react disastrously on the character of those concerned in it. 
Until socialism can be realised without it or without more of 
it than is now necessary to keep the enemies of society in 
order, its moral superiority over the present competitive sys- 
tem may well be questioned. At some future time, when men 
and women of a higher type compose society, socialism may 
prove practicable, but it does not seem to be adapted to 
men and women as they now are. And, it may be added, 
when human beings are so perfected that the motives on which 
socialism relies are dominant, it will make little difference 
what form of industrial organisation is adopted. Competi- 
tion among such individuals will be, as it is now at its best, 
merely a generous rivalry between upright and fair-minded 
men, tempered by regard for the interests of others and re- 
strained by legal prescriptions. Such competition might re- 
sult in industrial relations as ideally perfect as those pictured 
in connection with socialism, and if these relations do not now 
prevail it is not because of the industrial system under which 
we live, but because of the imperfections of the men and 
women who compose society. 

Although less serious than the psychological obstacles to Difficulty 

the realisation of socialism, the administrative obstacles are f.^ ApP^^" 

tioniug 

sufficiently formidable. A few of them only will be referred Labour 
to: Assuming a population disposed to give socialism a fair g^Q^^jj,^!. 
trial and the government in control of all land and capital cally 
goods, a first difficulty would be in connection with the assign- 
ment of occupations to individual citizens. The interests of 
production would require a certain quota of workmen in each 
department of industry. But how, in the absence of compul- 
sion, could these quotas be secured? Under the present sys- 
tem the division is accomplished by the simple operation of 



528 



Plans of Economic Reform 



Difficulty 
of Valuing 
Goods 



Difficulty 

in 

Connection 

with 

Capital 



the law of demand and supply. Branches of production thai 
are inadequately manned attract more workers by offering 
them somewhat higher wages than are paid in other occupa- 
tions. What corresponding inducement could be offered under 
socialism? Is it not probable that in the absence of compul- 
sion or of wages apportioned to the competitively determined 
value of the service rendered, certain employments would at- 
tract many more workmen than were needed while others 
would be avoided? One writer has suggested that the dis- 
tribution of the available labour force could be accomplished 
by shortening the hours of employment in unpopular occupa- 
tions until they attracted their quota of workmen. This might 
prove a workable solution of the difhculty, but its practical 
operation would involve obviously a high order of administra- 
tive ability on the part of the directors of the nation's 
industries. 

A second difficulty concerns the determination of the values 
of different economic goods. Since these are produced on 
government account quite independently of markets and the 
higgling of markets, such determination would have to be 
made through the application of some administrative rule. 
One rule proposed is that each good be valued in proportion 
to the labour time involved in its production. But how could 
such labour time be measured ? What quality of labour should 
be selected as a standard? Should the product of a day's 
labour of a talented artist be valued the same as the products 
of the labour of a machine tender? If so, will there not be 
a continuing discrepancy between the demand for and the 
supply of the former? Shall no allowance be made for the 
part which land and capital goods play in production? The 
bare statement of these questions suggests the complexity of 
the problem which would confront the government in connec- 
tion with the mere valuation of the products of its farms and 
factories. 

A third difficulty concerns the decision as to the quantities 
of different goods to be produced from year to year, and espe- 
cially as to the proportions of the labour time of the com- 
munity that should be devoted to the production of capital 
goods and of consumers' goods, respectively. Each com- 



Conclusion 5^9 

munity would have it in its power to neglect entirely the 
interests of the future by failing to replace or add to its stock 
of capital goods, or to provide abundantly for future require- 
ments by devoting all the labour time not needed for the pro- r 
duction of current necessaries to the production of such goods. ' , 
What principle could guide government officials in deciding 
wisely on this all-important question? Would they not, as 
elected officers, be under a constant temptation to win popular 
favour by adding to the current supplies of goods at the ex- 
pense of the fund of capital? 

Finally, there would be the difficulty of deciding as to the Progress 
relative merits of different methods of production. If prog- H^^-^^i- 
ress were to continue, improvements on current methods would 
be constantly necessary. How much labour time should be 
diverted from the routine of production along old lines to in- 
dustrial experiments ? Who would determine when an experi- 
ment in a given direction should be abandoned as barren of 
result? Who would say when an old process and old ma- 
chinery should be given up and a new process and new ma- - • 
chinery substituted ? In actual industrial society these questions 
are answered crudely, but effectively, through the impartial 
operation of competition. The best process wins in the long 
run because it pays best. Would the best process be as likely 
to be preferred under socialism? 

Many other difficulties might be suggested, but enough has conclusioa 
been said to indicate the puzzling problems that would con- 
front the directors of a socialist state. One great merit of the 
present system is that it works. In the absence of proof one 
may be excused for doubting whether socialism would work 
an practice. Its operation would certainly call for a grade of 
administrative ability and a devotion to the public interest 
superior to any to be met with among elected officials of the 
present day. Our conclusion from this brief review of the ob- 
stacles to the realisation of socialism is that it is impracticable 
for the men and women who now compose civilised society. 
If the industrial world is moving in its direction, it is at a slow 
pace. For many years to come progress must consist in im- 
provements in the present competitive system calculated to 
-raise the plane of competition and equalise opportunities so 



530 



Plans of Economic Reform 



The 

Socialism 
«f Karl 



^^lliticistn 



that the children of the poor may enjoy educational advantages 
more nearly equal to those of the rich and the ownership of 
property may be more generally diffused. 

§ 290. In the foregoing sections the ideals of the group we 
have styled evolutionary socialists have been chiefly con- 
sidered. The other group, which we have styled the revolu- 
tionary socialists, looks upon the present industrial system as 
fundamentally unjust. A main tenet in their creed is that the 
whole product of industry is due to labour, and should there- 
fore go to labour, and that what landlords and capitalists take 
as rent and interest is practically stolen. The most elaborate 
defence of this view is contained in the work of the German 
socialist, Karl Marx, entitled Capital, which undertakes to ex- 
pose the iniquities of the present system and at the same time 
to show that it contains within itself the seeds of its own de- 
struction. Space will not permit a detailed criticism of this 
phase of socialism, but a few words should be devoted to it 
in closing. 

It is a fundamental error in analysis to ascribe the value 
of the products of industry to the labour involved in their 
production. Value, as already explained, is the joint result 
of utility and limitation of the supply. Under conditions 
of free competition value arises because of the cost involved 
in producing goods. This varies under different natural 
conditions and consequently rent appears. Under the least 
favourable natural conditions resorted to cost involves not 
only labour, but also the sacrifice involved in supplying 
the capital indispensable to efRcient production. The value 
of the product m.ust be great enough to remunerate work- 
men and capitalists, or the inducement which causes those 
at the margin of doubt between saving and spending to save 
will be removed and the fund of capital will be reduced. The 
payment of interest is as just and, economically, as necessary 
as the payment of wages. It is the premium industrial society 
offers to those who will furnish it with the capital it needs and 
it is never higher than is necessary to secure this capital. It 
is true that much of the needed capital would be furnished if 
there were no premium, but it is equally true that many work- 
men, and especially those whose work is of most value to so- 



Cooclusion 53^ 

ciety, would work for nothing rather than abandon their 
chosen professions. In each case the reward is determined by 
the character and motives of the marginal men in the group 
affected. In each case, moreover, the necessity of rewarding 
these marginal men gives a value to the product sufficient to 
reward at the same rate all men in the group. The interest 
capitalists receive is in no sense subtracted from the reward 
that goes to labour. It comes from the extra product due to 
the assistance which capital goods render to production, just 
as the wages of labour come virtually from the products of 
labour. In neither case is there any exploitation of one factor 
by the other. If this analysis is accurate the whole contention 
of Marx and his followers falls to the ground, and the present 
industrial system is cleared of the charge of being based on 
the legalised robbery of the labouring by the propertied class. 

§ 291. In criticising land nationalisation and socialism as Conclusion 
plans of economic reform, there has been no wish to make 
light of the evils in the present industrial order to which they 
respectively refer. Both owe the strength of the appeal which 
they make to fair-minded men to the fact that the material 
aids to production, land and capital goods, are unequally 
distributed and that, as a result, every community presents 
the contrast between the bare-handed labourer of ordinary 
intelligence who, by his best endeavours, can earn only a scant 
livelihood and provide but indifferent educational advantages 
for his children, and the idle man of property, who has every- 
thing, although he does nothing. This unequal distribution 
of property may be necessary, but no amount of reasoning can 
make it seem other than unfair to the portionless children of 
the poor. Before taking up in the last chapter the question 
as to how far an unequal distribution of wealth is a necessar}'^ 
condition to progress, we must next consider the subject of 
public finance, a domain in which many reformers besides 
Henry George have sought a remedy for present inequalities. 

REFERENCES FOR COLLATERAL READING 

Gilman, Profit-sharing between Employer and Employee; *Sckloss, 
Methods of Industrial Remuneration; Report of Proceedings of 
Industrial Remuneration Conference, London, 1885; *Jones, Co-oper- 
ative Production in Great Britain, 2 vols. ; Holyoake, History of Co- 



532 Plans of Economic Reform 

operation, 2 vols., and The Co-operative Movement of to-day; * Lloyd, 
Labour Copartnership; Annals of the English Co-operative Whole- 
sale Society; Proceedings of the Congresses of the International 
Co-operative Alliance (especially of Fifth Congress, Manchester, 
iqo2); ^George, Progress and Poverty; Dawson, The Unearned 
Increment; Wallace, Land Nationalisation; * Shearman, Natural 
Taxation; *Rae, Contemporary Socialism (includes chapter on 
" Single Tax "); *Kzrkup, History of Socialism; Menger, The Right 
of Labour to the Whole Product; * Fabian Essays in Socialism; 
*Schiiffle,Th.e Quintessence of Socialism; Marx, Capital, 3 vols.; 
*Bdhm-Ba'werk, Karl Marx and the Close of his System; * Bellamy 
Looking Backward, and Equality. 



CHAPTER XXVII 

GOVERNMENT EXPENDITURES AND GOVERNMENT 
REVENUES 

§ 292. With the exception of money and banking there Importance 
is no topic in economics to which more attention and litera- S.^. ^"^'^^'^ 
ture have been devoted than to that of government or public 
finance. In this treatise it is possible to discuss only the more 
important aspects of the subject, and government expenditures 
and government revenues from other sources than taxation 
are considered only so far as is necessary to introduce the 
questions of Taxation and Tax Reform in the United States 
dealt with in the next chapter. 

Perhaps the best way to determine what are the actual Government 
functions of government is to examine a statement of public tures in 
expenditures for a typical year. The table on the next page, United 
drawn from the eleventh census of the United States, sum- 
marises the expenditures of all of the different branches of the 
government for the year 1890. 

The largest single item of expenditure is for public edu- For 
cation. Although among the latest to be assumed education 
is now recognised as one of the most important functions of 
the democratic state. The economic justification for main- 
taining free schools, free colleges, and even free universities at 
public expense, has already been suggested.* Quite as con- 
clusive is the political justification. Successful self-govern- 
ment is only possible for communities in which there is a high 
level of general intelligence. This high level is most easily, 
surely, and cheaply attained and perpetuated by means of free 
public education. 

Next to expenditures for education from the point of view For 
both of costliness and importance are those connected with ® ^"^^ 
national defence. In the United States the actual outlay upon 

* C/. Chapter XIII.. Section i$t}^ 
533 



534 Government Expenditures and Revenues 

EXPENDITURES OF NATIONAL, STATE, AND LOCAL 
GOVERNMENTS IN THE UNITED STATES IN 1890. 

1. Educational purposes $145,600,000 

2. Military pensions 106,900,000 

3. Military purposes 57,500,000 

4. Interest on public debt 82,700,000 

5. Police departments 23,900,000 

6. Health departments 3,300,00a 

7. Fire departments 16,4^0,000 

8. The judiciary 23,000,000 

9. Penal and reformatory institutions .... 12,400.000 

10. Charities 40,000,000 

31. Indians 6,700,000 

12. Improving rivers and harbours 11,700,000 

13. Roads, bridges, sewers, and ditches • . . , 72,300,000 

14. Postal service ......... 66,300,000 

15. Lighting 11,400,000 

16. Public buildings and their maintenance . . . 56,800,000 

17. Public parks and places 3,000,000 

18. Executive departments ....... 16,800,000 

19. Congress and legislative departments .... 10,500,000 

20. Foreign intercourse 1,600,000 

21. Salaries, fees, and commissions ..... 37,600,000 

22. Miscellaneous expenditures 109,500,000 

Total .... 915,900,000 



army and navy in time of peace is relatively small. When to 
this is added however the enormous pension bill, which an 
over-generous Congress has created for the benefit of those 
who have participated in the nation's wars, and the interest 
on the public debt, most of which was incurred in connection 
with these same wars, expenditures for national defence are 
seen to be even greater than expenditures for education. 

Third in the list are outlays connected with the protection 
of life, health, and property within the country and the ad- 
ministration of justice. In this group belong, of course, the 
expenditures on penal and reformatory institutions, which pro- 
tect society by isolating for a time those who have shown an 
anti-social disposition. 

The charitable relief of the defective and dependent and 
special provision for the Indians present a fourth governmen- 
tal function. 



Expenditures in the United States 535 

The fifth group of expenditures is concerned with the For 
nation's material interests. Different branches of the govern- Industrjai 
ment spend vast sums on the improvement of rivers and har- 
bours, on roads, bridges, sewers, and ditches, on the postal serv- 
ice, for lighting the public streets, for the erection and main- 
tenance of public buildings, and for public parks and other 
places of public amusement. 

A sixth group of expenditures relates to the ordinary de- For 
partments of government whose existence is necessary to the ^epatt-^ 
continued operation of all of the different functions that have Governmeut 
been enumerated. In addition to the executive and legislative 
branches there are the representatives of the country abroad 
and various bureaus and commissions, some educational, some 
administrative, and some judicial in character, that are main- 
tained. 

Finally, there are miscellaneous expenditures important in For 
the aggregate, since they constitute more than one-ninth of i^n^eous 
the total, but not readily differentiated in a simple scheme of Purposes 
classification. 

§ 293. Diverse as are these expenditures and the functions Government 
.,,.,, 11 . Expendi- 

m connection with which they are made, they have one tures De- 
common characteristic. All are undertaken for the purpose signed to 

. , , - . Promote the 

of promoting the general welfare. From the point of view General 

of political theory the relation between public and private ac- Welfare 
tivities in self-governing communities is exceedingly simple. 
Through his private activities each individual secures, so far 
as his means will permit, those commodities and services which 
he requires to satisfy his wants and the wants of those depend- 
ent upon him. But certain wants are collective in their na- 
ture, and certain services can only be rendered satisfactorily 
by a central authority acting as the agent or servant of the 
whole community. The satisfaction of these wants and the 
rendering of these services are the tasks of the government. 
Every one needs to be protected. For this purpose armies and 
navies are maintained, police and fire departments are organ- 
ised, courts of justice are provided, and penal and reforma- 
tory institutions are supported. The well-being of every one 
requires that educational institutions of high standard shall be 
freely open, if not to themselves and their own children, at least 



536 Government Expenditures and Revenues 

to their neighbours and their neighbours' children, so that an 
educated pubHc opinion may be created as a guarantee that 
just laws will be passed and efficiently enforced. The concern 
of every one in the other expenditures described is nearly, if 
not quite, as clear as that in protection and education. They all 
have to do with general and public interests and are justified 
only to the extent that through them these interests are ad- 
vanced. 

Some writers have sought to formulate definite rules by 
means of which it can be judged in advance whether a given 
activity should or should not be undertaken by the govern- 
ment. Such rules are helpful when based upon actual experi- 
ence but when based, as is usually the case, upon some dogma 
as to the proper sphere of the state, as that its sole duties are to 
protect Hfe and property and administer justice, they are al- 
most certain to be misleading. Developing states find it ad- 
vantageous to assume very dififerent functions at different 
periods. On the whole as political organisation becomes more 
efficient, there appears to be a tendency for the functions of 
the state to broaden. Whether this is desirable or not can 
only be determined by experience of its effects. If in this 
way the well-being of the whole community is increased, the 
change is justified. There is no other universally valid cri- 
terion by which the rightness of either public or private action 
can be determined. 

§ 294. The dividing line between public and private ex- 
penditures corresponds with the division betv/een public and 
private activities. Each community has a limited supply of 
commodities and of workmen capable of rendering services. 
The government should withdraw from private industries so 
many and only so many workmen as can produce as public 
servants services and commodities of greater value than those 
turned over to such servants as their compensation. Through 
public expenditures a part of the wealth that would otherwise 
be available for private use is capitalised in public works or paid 
out in wages or salaries to public servants. Unless the re- 
sulting commodities and services are worth more to the com- 
munity than what has been given for them the public expen- 
ditures are unwarranted. 



Division of Governmental Functions 537 

Simple as the matter is when stated in general terms, it 
presents serious practical difficulties. There is no way of 
measuring the value to a country of a standing army or of the 
" biggest navy afloat." Comparisons of the services of such 
public institutions with their cost when made by the " expan- 
sionist " and the " anti-imperialist " lead to very divergent con- 
clusions. Equally difficult is the measuring of the value of the 
other services of government. That free public schools are 
worth even more than they cost will be generally admitted, but 
how shall it be determined how much of the people's money 
shall be expended on the maintenance of free public universi- 
ties? The line must be drawn somewhere, but the difficulty 
of deciding where is illustrated every time an appropriation 
bill affecting a state-supported university comes up for con- 
sideration before one of the state legislatures. These practical 
difficulties differ, however, only in degree from the difficulties 
that arise in connection with all expenditure. Parents are 
often as much puzzled to determine whether a college educa- 
tion will be a " paying investment " for their sons, as are state 
legislatures to decide whether it will " pay " to invest more of 
the people's money in the institutions that offer college educa- 
tions. In the former case individuals, in the latter the people's 
representatives must consider the alternative uses to which 
the same sums of money might be put. Unless it is clear that 
the thing secured is worth, when broadly considered, more 
than it costs, the expenditure is unwarranted. 

§ 295. In a federal state like the United States different Division ol 
<> -'^ Govern- 

functions are performed by different branches of the govern- mental 

ment. National defence, the improvement of rivers and har- unU^ed""^ ^" 
bours, the promotion of foreign trade and intercourse, and States 
to some extent the administration of justice are functions un- 
dertaken by the national government. To the states are al- 
lotted tasks connected with the development and administra- 
tion of business law, or justice, the maintenance of penal insti- 
tutions, the care of many of the defectives and dependents who 
are incapable of self-support, the development and maintenance 
of higher educational insti^^iutions, and the furthering of certain 
of the material interests of the community ranging all the way 
from the construction and operation of canals to the extermina- 



Correspond- 
ing Division 
of Expendi- 
tures 



Relative 
Importance 
of Public 
and Private 
Expendi- 
tures in 
United 
States 



538 Government Expenditures and Revenues 

tion of insects harmful to vegetation. The functions dele- 
gated by the state legislatures to local governing bodies, coun- 
ties, cities, boroughs, towns, school districts, etc., are similar 
to those assumed by the states themselves but more local in 
character. Among these the maintenance of the common 
schools, and of streets, bridges, sewers and ditches, the sup- 
plying of water, and the protection of life, health, and prop- 
erty are among the most important undertaken by govern- 
ment. 

An approximate idea of the division of governmental func- 
tions is afforded by statistics of the expenditures of the differ- 
ent branches of government. In the census year 1890 the total 
expenditures of the national government were $630,000,000, 
which was approximately $10 per capita. In the same year the 
state of New York expended $13,170,000, or $2.20 per capita 
of its population,* and the city of New York $34,985,000, or 
approximately $23 per capita of the city's population. In the 
next census year, 1900, the expenditures of each of the de- 
partments of the government were larger in proportion to the 
population. The national government spent $886,000,000, or 
$11.66 per capita; the state of New York $23,934,433, or $3.30 
per capita ; and the city of New York $94,417,964, or $27.80 per 
capita. There was thus an increase in per capita expenditures 
in all three departments of the government but not one to 
alter seriously the relation between them. From the point of 
view of expenditure we may conclude that the local govern- 
ing bodies, or at any rate the cities, are more than twice as 
important as the national government, while the national gov- 
ernment itself is three or four times as important as the states. 

§ 296. The above figures are significant also for the light 
they throw upon the relative importance of governmental and 
private expenditures in the United States. Making allowance 
for the fact that the expenditures of New York State and 
City are larger in proportion to their populations than those of 
the other state and local governing bodies we may assume that 

* The expenditures of the forty-five states then in existence amounted 
in the same year to $105,904,997, which was $1.70 per capita of their 
population. Cf. New York State Library Bulletin, No. 8 (March, 1897), 
on State Finance Statistics, 



Sources of Public Revenues 539 

the annual expenditures of all branches of the government 
amount to from $30 to $35 for every man, woman, and child in 
the United States, or to from $150 to $175 for the average 
family of five persons. We have no certain way of measuring 
the average family income in the United States exclusive of 
what is paid to the government in the form of taxation but it is 
a liberal allowance to assume that it lies somewhere between 
$700 and $900 a year. If we take the upper figure for govern- 
mental expenditures and the lower figure for family income it 
appears that as much as one-fifth of the total national income 
is expended each year by the different branches of the govern- 
ment, leaving only the other four-fifths to be spent or accumu- 
lated by individuals. Combining the other extremes the gov- 
ernmental expenditures are found to be one-seventh of the total, 
leaving the other six-sevenths for individual disbursement. 
Somewhere between these limits of one-fifth and one-seventh 
of the total national income governmental expenditures very 
probably lie. When the full significance of this fact is realised, 
the importance of honest, efficient, and intelligent government 
begins to be appreciated. 

§ 297. The revenues expended for public purposes are de- Sources of 
rived from a variety of sources. Writers on finance have de- Revenues 
voted much thought to their classification but for our purpose 
it will suffice to distinguish the following : ( i ) public lands and 
industries; (2) special assessments; (3) taxes; (4) loans; (5) 
miscellaneous sources. 

The income from public lands and industries depends obvi- ^^^^^'^i^®?,. 

. , , ,. From Public 

ously upon the governmental policy m reference to the pubhc Lands 

domain and in reference to embarking upon industrial enter- 
prises. In the United States, notv/ithstanding the vast ex- 
tent of the public lands, comparatively little net revenue has 
been derived from these sources. The public land policy has 
been controlled from an early period by the thought that it is 
better to sell the lands, even for merely nominal sums, to per- 
sons who will really settle upon them and bring them under 
cultivation than to treat them as an important source of 
revenue. In consequence of this policy the federal government 
now receives an annual average of only two or three million 
dollars from this source, while it expends considerably more 



540 Government Expenditures and Revenues 

than this upon the bureaus, whose function it is to study and re- 
port upon the land and natural resources of the country. The 
income of the states from the public lands has been somewhat 
larger proportionally, but only for Texas,* which entered the 
Union with a vast public domain, has it ranked as a chief 
source of revenue. 
From The only important public industries carried on in the United 

Industries States are the post office and municipal water systems and both 
of these are conducted on the principle of charging no more 
than the service actually costs. In the case of the post office 
this has usually resulted in a deficit which must be made good 
out of the other sources of revenue. 
From The second and third items, special assessments and taxes. 

Assessments ^^^ usually treated together and are the principal sources of 
and Taxes revenue of all modern governments. As the remaining sec- 
tions of this and the following chapter treat of taxes nothing 
further need be said about them at this point. A special as- 
sessment has been defined as " a payment made once for all to 
defray the cost of a specific improvement to property under- 
taken in the public interest, and levied by the government in 
proportion to the particular benefit accruing to the property- 
owner."f Such assessments are resorted to very commonly by 
American municipalities in connection with public improve- 
ments like the laying out of streets, the paving of streets, the 
laying of sidewalks, etc., which normally add to the value of 
adjoining property. In such cases it seems entirely appropri- 
ate that the persons receiving a special and peculiar benefit 
from the improvement, should contribute in a special and pecu- 
liar way towards the expenditure which it involves. Unfor- 
tunately the instances are comparatively rare where the special 
benefit enjoyed as a result of government outlay can be dis- 
tinguished from the general benefit, and for this reason the 
field for the application of the special-assessment principle is. 
rather limited. 

* This state derived from its public lands $1,317,453 in 1890 and 
$864,921 in 1895. Its present land policy is illustrated by the fact that 
on September i, 1905, it offered for sale 6,000,000 acres at a minimuroi • 
price of $1 an ncre to bona fide settlers. 

f Seligman, Essays m Taxation, p. 304. 



Revenue from Loans 541 

§ 298. Loans constitute an extraordinary rather than an From Loans 
ordinary source of revenue. For governments as for indi- 
viduals, borrowing in order to meet current expenditures simply 
puts off the time when the needed revenue must be obtained 
from some other source. Since to such postponement is added 
the disadvantage that interest must be paid for the sums bor- 
rowed, a resort to loans is only justified under special circum- 
stances. 

Writers on finance agree in distinguishing three different War Loans 
cases in which government loans may properly be made. The 
first and most important is when a government is confronted 
by a war or some other serious emergency which demands im- 
mediate and large outlays. In this case the well-being not only 
of the present but of future generations is at stake and a part 
of the sacrifice which must be made may well be imposed upon 
those who are to contribute to the government's revenues in 
future yearSo Moreover the money needed must be secured im- 
mediately and there is no device through which returns may 
be obtained at once comparable with that of borrowing. For 
these reasons part of the revenue required may be derived from 
the sale of government bonds, or promises to repay at some 
future date with interest the sums received in the present. In 
inaugurating a borrowing policy the government must be care- 
ful, however, to inaugurate at the same time changes in other 
parts of the revenue system which will insure the means of 
paying interest and principal in full as they fall due. Almost 
if not quite as important as immediate command over money 
for a government embarked upon a war is unimpaired credit 
or future borrowing power. Unless the government's credit is 
protected it may find itself helpless at the very time when a 
second loan is needed to carry the war to a successful issue. 
The device which is now very generally employed to reassure 
lenders who entrust their savings to the government is that of 
a sinking fund. Revenues constituting a certain proportion of 
the outstanding obligations are dedicated each year to the 
debt service, and in this way a sufficient sum is secured to pay 
the principal of the debt when it becomes due. Contributions 
to the sinking fund can only be made, of course, if the ordinary 



542 Government Expenditures and Revenues 

revenues are increased and this is usually brought about 
through extraordinary or war taxes. 

The second case when government borrowing is warranted 
is when the money is needed for the development of some pro- 
ductive public industry. If a city proposes to install its own 
water works, for example, it may very properly borrow money 
for the purpose and adjust the water rates so that they will 
provide enough to pay the interest on the debt and to accumu- 
late a sinking fund out of which the principal may be repaid 
when it falls due. This is the more defensible because the bene- 
fits of the expenditure are shared by all who make use of the 
city's water so long as the system continues to be used. 

The final case in which a resort to a loan may be defended 
is to make up for a small deficiency in the year's revenues. 
Careful financiering requires that the government's income 
should balance as nearly as possible its expenditures. But the 
income is somewhat irregular and unless the public treasury 
is to keep on hand a considerable surplus for which it expects 
to have no use, which is undesirable, it must often occur that 
the legitimate expenditures run ahead of the revenues. Under 
these circumstances a government is clearly justified in securing 
a temporary loan to be repaid the following year, out of the 
larger revenues resulting from a contemporaneous change in 
the law controlling other sources of income. 

§ 299. In the United States as in all modern countries the 
above principles in reference to public loans have frequently 
been disregarded. It is so easy to obtain money by borrow- 
ing and so difficult often to obtain it in any other way that 
public authorities are under a constant temptation to issue and 
sell bonds when they ought rather to increase taxes or exercise 
more economy on the side of expenditures. Experience with 
the evils of reckless pledging of the public credit has led in 
most of the states to the imposition of constitutional restrictions 
on the borrowing power. No such restriction has been imposed 
upon Congress and on the whole the federal debt — except dur- 
ing the critical period of the Civil War — has been kept within 
reasonable limits. The restrictions on the states usually take 
the form of limiting the amount that may be borrowred to a 
certain proportion of the value of the taxable property within 



Revenue from Gifts 543 

the state. The limitations on municipalities, also contained in 
many of the state constitutions, are sometimes even more rigid. 
Thus the constitution of New York State, adopted in 1894, lim- 
its the indebtedness v^^hich any city within the state may incur 
to ten per cent of the assessed valuation of its real estate. Ex- 
ception is made of revenue bonds issued in anticipation of re- 
ceipts from taxes and of water bonds but the latter must be 
counted as a part of the debt when the issue of bonds for any 
other purpose is contemplated. This provision has been justly 
criticised on the ground that it makes no distinction between 
loans contracted in connection with public industries, the in- 
come from which will be ample to repay the loans without im- 
posing any additional burden upon taxpayers, and loans which 
must ultimately be repaid out of the revenues derived from 
taxes. For the former class of loans the limitation is much 
too rigid and in the case cited it is already having the effect 
of seriously retarding legitimate and much-needed municipal 
improvements in the cities of the state. 

§ 300. The sources of public revenue referred to as mis- Revenue 
cellaneous include such diverse items as gifts, fines and other Qjftg 
penalties, and fees. In the United States gifts figure among 
public receipts chiefly in the form of donations to the " con- 
science fund " and are neither large nor important.* Few 
persons seem to realise that in giving to the government they 
are contributing to the one agency whose primary business it 
is to advance the general welfare. Contrasted with the lavish 
gifts to private and denominational schools and universities 
which are constantly being made by America's rich men, the 
gifts to the public schools and the state-supported universities 
are so infrequent as to excite general comment when they 
occur. The attitude of mind towards the government which 
this fact reflects is partly inherited from the past, when all 
persons not in the privileged governing class were as a matter • 
of course opposed to the government, and partly the result 
of a wide-spread distrust of the officials who control public 
expenditures. It is to be hoped that as time goes on it 
may give place to a juster appreciation of the importance 
of the services which the government renders. Certainly 
* Exception must be made of Mr. Carnegie's libraries. 



544 Government Expenditures and Revenues 

there is no way in which a man of wealth can more greatly 
benefit the city in which he lives than by supplementing public 
expenditures for better school facilities and more ample parks 
and play-grounds, or in general at those points where the pub- 
lic need is greatest and the expenditures least adequate. 

Fines and other penalties, such as the confiscation of property 
unlawfully brought into the country, are unimportant sources 
of revenue and require no special comment. By a fee is meant 
" a payment to defray the cost of each recurring service un- 
dertaken by the government primarily in the public interest, 
but conferring a m.easurable special advantage on the fee- 
payer."* It is distinguished, on the one hand, from the price 
paid for a commodity supplied by the government, such as a 
water rate, because the primary motive of the government in 
rendering the service, issuing marriage licenses for example, 
is regulation in the public interest, the benefit to the individual 
paying the fee being secondary. On the other hand, it is dis- 
tinguished from a tax in that it is a payment for a special 
benefit enjoyed by the payer, whereas taxes are a return for 
general benefits. As a rule fees are made only high enough 
to cover or partly cover the cost of the service rendered. Ex- 
perience has shown that they ought not to be relied upon to 
compensate the official who collects them because they are cer- 
tain to yield either less or more than a fair compensation for 
the work done and thus to demoralise the public service by 
rewarding unequally officials of the same grade. 

§ 301. A tax may be defined as a compulsory contribution 
to the government to defray expenses incurred for the com- 
mon benefit without reference to special advantages enjoyed. 
The points to be emphasised in this definition are that the 
payment is compulsory, that the proceeds are to be used for 
the common benefit, and that the justification for the payment 
is participation in these common benefits rather than any special 
advantage enjoyed. The last statement is given prominence 
because it throws light upon the first question that arises in 
connection with any system of taxation, that is, as to the 
principle according to which taxes should be apportioned 
among the individuals in a community. A little thought shows 
* Seligman, Essays in Taxation, p. 304. 



The Equal Sacrifice Theory 545 

that the correct principle of apportionment cannot be that of 
special benefit received from government expenditures. Those 
who need public assistance most, abandoned children, paupers, 
the insane, etc., are the very ones who are least able to pay- 
taxes. On the other hand those who are able to pay most seem 
often in little need of those services which the government ren- 
ders. Men of means may employ private detectives, watchmen, 
etc., to look after their persons and property, they do not 
usually send their children to the public schools, and in other 
ways they make little use of those things which the govern- 
ment supplies gratuitously. Obviously if each paid taxes only 
in proportion to the special benefits enjoyed, the whole busi- 
ness of government might be brought to a standstill. 

Opposed to the principle of taxation in proportion to benefits Taxes 
is that of taxation according to ability to pay, or the " faculty " oi-, g'ach in 
theory. This rests on the broad ground that it is impossible Proportion 
to measure the benefits which individuals owe to the govern- ^ 

ment, because without government civilised society could not 
exist. From the time a person comes into the world, 
whether he be rich or poor, his development and success at 
every stage is conditional upon the presence of the machinery 
for preserving order, protecting life and property, and adminis- 
tering justice. All that can be said of these benefits is that 
their importance for every one is inestimable, and that the only 
test of what should be given in return for them is the ability of 
the giver. The true relation between the government and the 
tax-payer is thus like that between the member and his church. 
Each should contribute according to his means and recognise 
that the return in the services rendered by the government 
much more than compensates, for any contribution, no matter 
how large. 

To give greater precision to the principle of ability or faculty The Eqaal 
it has been suggested that the test to be applied is that of Theory 
" equal sacrifice," that is, that the contributions to the state 
should impose equal sacrifices upon all of those who contribute. 
This test would be quite valid if it could be accurately applied, 
but in practice in the apportionment of taxes it is possible to 
attain only approximate justice, and for this purpose the ability 
or faculty test is sufficiently exact. 



Principal 
Taxes Im- 
posed in 
United 
States 



Tax Pro- 
visions of 
Federal 
Constitution 



546 Government Expenditures and Revenues 

§ 302. The principal taxes imposed in the United States 
may be classified as follows: Taxes on income, including in- 
heritance taxes ; taxes on property ; and taxes on business, in- 
cluding excise taxes and customs duties.* The federal govern- 
ment derives more than nine-tenths of its net revenue from in- 
ternal revenue or excise taxes, and tariff or customs duties. 
These are described as taxes on business because they apply to 
commodities usually before they have come into the possession 
of consumers and consequently affect business relations. The 
revenues of the states come for the most part from the general 
property tax and from corporation, license, and inheritance 
taxes. The last are characterised as taxes on income because 
from one point of view inheritances are income and may be 
so described for purposes of taxation. Finally, the local 
governing bodies depend for their revenues mainly upon the 
general property tax, which may be supplemented by local 
license taxes. 

Among the influences which have given its present form 
to the system of taxation in operation in the United States are 
certain provisions inserted in the federal constitution when 
the country was still in its infancy and altered only by judicial 
interpretation since. Of these the most important are : 

( 1 ) The requirement that " all duties, imposts, and excises 
shall be uniform throughout the United States." 

(2) The provision that " no capitation or other direct tax 
shall be laid [by Congress] unless in proportion to the census '* 
of population. 

(3) The provision that " no tax or duty shall be laid [by 
Congress] on articles exported from any state." 

(4) The provision that " no state shall, without the consent 
of the Congress, lay any impost or duties on imports or ex- 
ports, except what may be absolutely necessary for executing 
its inspection laws." 

The principal effects of these provisions have been to make 
the courts very strict in their insistence on the rule that taxes 
must be " uniform" ; to give to the federal government ex- 
clusive use of import duties as a source of revenue; to pre- 
vent any hampering of the country's export business through 
* Adams, T/ze Science of Finance, pp. 335 et seq. 



The Incidence of Taxes 547 

taxation ; and to nullify the income tax imposed in 1894 and of 
which more will be said hereafter. Although in the last in- 
stance the government was seriously embarrassed by the con- 
stitutional restriction, writers on finance generally approve 
these provisions as having behind them sound reasons of public 
policy. Certainly the freedom of exports and immunity from 
state interference with imports guaranteed by the constitution 
have been of the greatest value to the country's foreign trade. 

§ 303. To form an opinion whether the various taxes enu- The Shift- 
merated above obey the principle " taxation according to incidence 
ability," it is necessary to consider in connection with each the oi Taxes 
question : by whom is the tax paid and how does it affect the 
general distribution of income in the community, upon which 
ability to pay depends. The first of these questions is that of 
" shifting and incidence " and the second merely a special 
phase of the general problem of distribution. 

It is a fact familiar to every one that taxes are often 
shifted by those who pay them to others so that ultimate pay- 
ment may be made by persons ignorant of the taxes' very 
existence. This shifting is often very complicated and our 
treatment of it must be illustrative rather than exhaustive. 

Customs duties and excise taxes are imposed on commodities The inci- 
usually in the hands of dealers. After they have been in force Customs 
for a reasonable time it is obvious that they will be looked upon and Excise 
as additions to the expenses of producing and selling the com- 
modities affected. Like other items in the expense of produc- 
tion they will have to be covered in the long run in the prices 
for which the goods are sold, or in other words they will nor- 
mally be shifted from the seller to the buyer and ultimately to 
the consumer. This does not necessarily mean that the pric< 
after the tax is imposed will be higher than the earlier pric 
by the exact am^ount of the tax. As the price rises purchases 
will decrease and in the readjustment of the supply which be- 
comes necessary other items in the expense of production may 
be altered. Or the commodity may be the product of a 
monopoly, which can well afford to bear a part of the tax itself 
and which is already charging the public as high a price as is 
prudent. Thus as the result of the tax the price may remain 
unchanged or be advanced only enough to cover a part of the 



548 Government Expenditures and Revenues 

tax, to exactly cover the tax, or by an amount even greater 
than the tax. Confronted by these different possibilities, the 
economist finds it difficult to lay down any rule as to the justice 
of customs and excise taxes. Where they are shifted in part 
to consumers they involve acceptance of expenditure for the 
commodities concerned as the test of ability to pay taxes. It 
needs no extended argument to prove that this is a very unfair 
test. The expenditures of the poor for sugar, woollen goods, 
tobacco, malt and spirituous liquors, and many of the other 
things that are taxed in the United States are very much 
larger in proportion to their incomes than the expenditures of 
the rich. In so far as taxes of this sort are shifted to con- 
sumers, they impose a disproportionate burden upon the poorer 
classes. 

§ 304. The general pi-operty tax is an institution peculiar to 
the United States to be explained by reference to the condi- 
tions found in a primitive agricultural community. When the 
American states began imposing taxes they accepted two prin- 
ciples for their guidance, first, that every head of the family 
should contribute something towards the support of the govern- 
ment and, second, that the amount of a man's property was the 
fairest index of his ability to pay taxes. In harmony with 
these views they imposed poll and general property taxes. 
Because of their inconvenience and of the small returns to be 
derived from them poll taxes have now been given up by most 
of the states, but the general property tax is almost universally 
retained. 

The question of the incidence of the general property tax is 
complicated by the fact that in practice a large amount of 
property escapes assessment. The law usually distinguishes 
between real estate and personal property. The former, which 
includes with the land all buildings that may have been erected 
upon it, is easily assessed and since it cannot be removed 
serves itself as security that the tax will be paid. Personal 
property on the other hand, which includes not only such 
things as furniture, vehicles, wearing apparel, tools, imple- 
ments, etc., but also such things as money, notes, mortgages, 
stocks, bonds, etc., cannot by any means that have yet been 
devised, be acoiirately assessed and consequently escapes in 



The Personal Property Tax 549 

large measure its share of taxation. It would take too long 
to describe the different ways in which the owner of personal 
property, such as shares of stock or bonds in a foreign cor- 
poration, may evade the tax assessor. Deliberate concealment 
of the securities subject to the tax is usually easy. To make 
this more certain the securities may be issued in the name of 
some other person. Fictitious debts may be created and de- 
clared to offset fully the securities owned. In these and 
many other ways all who wish to escape taxation on their 
personal property may do so with little risk of detection. 

§ 305. The results that follow from this easy evasion of Evidence 
the personal property tax have become notorious. In those gonal ^^" 
very states where it is well known that personal property is Property- 
increasing most rapidly the amount that is taxed actually xaxatioa 
diminishes. Thus in California between 1872 and 1887 while 
the assessed value of real estate increased from 417 to 791 
million dollars, the assessed value of personal property de- 
creased from 220 to 164 millions. By 1893, although the 
value of real estate had continued to increase until it was 
over 1,000 million dollars, the value of personalty had in- 
creased to only 173 millions. In New York the assessed value 
of real estate has increased steadily and continuously since 
it first passed the $1,000,000,000 mark in 1853. In that year 
the assessed value of personal property was $250,000,000, so 
that it bore one-fifth of the tax. By 1875 the value of real 
estate exceeded $2,000,000,000 but the value of personalty 
had increased to only $358,000,000, so that it bore about one- 
seventh of the tax burden in that year. The $3,000,000,000 
mark for the value of real estate was passed in 1886, but in 
that year the value of personalty was only $336,000,000 or 
actually less than it had been eleven years before. It thus 
bore only a little more than one-tenth of the tax. The tend- 
ency for the assessed value of real estate to advance and for 
that of personalty to lag behind has continued since until at 
present in the richest state in the Union, whose wealth consists 
very largely of corporate securities, personal property repre- 
sents less than ten per cent and real estate more than ninety 
per cent of the property assessed for the general property tax. 
So conspicuously does the personal property tax fail to reach 



Incidence of 
a Perfect 
General 
Property 
Tax 



Analysis oi 

the General 

Property 

Tax 



Tax on 
Land Paid 
by Land- 
owner 



550 Government Expenditures and Revenues 

the property of those who are unwilHng to pay that it has 
been justly described as " debauching to the conscience and 
subversive of the pubhc morals — a school for perjury, pro- 
moted by law." It falls only on those who are too scrupulous 
to evade it, and, as its unfairness becomes more widely recog- 
nised, the number who are willing to carry burdens which 
their neighbours callously throw off becomes smaller and 
smaller. 

§ 306. In those communities, if any such remain, in 
which personal, as well as real, property is assessed at its full 
value, the general property tax falls upon all in proportion to 
their means and thus satisfies fairly well the canon that taxa- 
tion should be in proportion to ability. It does not do so com- 
pletely because obviously it fails to reach the income derived 
from personal exertion. Salaries, profits, professional earn- 
ings all escape and in some cases those who receive their in- 
comes in these forms have no property to speak of and con- 
sequently contribute nothing to the government. Thus the 
general property tax even when perfectly administered would 
need to be supplemented with a tax upon incomes from per- 
sonal exertion to satisfy completely the requirements of jus- 
tice. 

But, as has just been shown, in practice, especially in the 
more highly developed sections of the country, personal 
property very largely escapes the tax. The general property 
tax becomes in consequence a tax on real estate, upon certain 
kinds of personal property, and upon the conscientious owners 
of all kinds of personal property. To determine who pays 
this tax we must go even a step farther and describe it as a tax 
on land, on buildings, on certain sorts of personal property, 
and on certain sorts of personal property owners. 

The real estate tax must be subdivided into the land tax and 
the buildings tax because the economic effects of these two 
taxes, even though assessed at the same rate and as one tax, 
are very different. The part of the tax that falls on land is 
paid by the landowner whether he occupies the land himself 
or leases it to another. To understand why this must be the 
case it is only necessary to recall how the rent and value of 
pieces of land are determined.* The land supply of the 
* Cf. Chapter XII 



Incidence of a Land Tax 551 

country, determined broadly speaking by natural conditions, 
is divided up into different grades and each piece of land 
commands a rent depending upon the demand for land of that 
grade and the supply of such land and other land that might 
if it were economically desirable be devoted to the same econo- 
mic use. Once determined by the competition and bargain- 
ing of landowners and land-users this rent will be changed 
only if some cause changes either the demand for, or the 
supply of such land. Moreover the value of the land is this 
rent capitalised at the current rate of interest. There is no 
means by which the landowner can shift a tax on land pro- 
portioned to its rent or selling value to the lessor or user, be- 
cause the latter is already presumably paying the full econo- 
mic rent for it. If asked to pay more he or some one in the 
group using the same grade of land will use instead land of 
somewhat inferior grade. The users of this land in turn if 
asked to bear a part of the tax will move to the land of still 
lower grade. Thus the attempt to shift the tax, there having 
been no increase in the demand for land — and there is noth- 
ing in the imposition of a tax to cause such an increase — , is 
opposed by a moving away of lessors who are already paying 
all they are willing to pay. This resistance will continue until 
some have withdrawn entirel}^ from the area over which the 
tax extends, with the result that land which was formerly oc- 
cupied will be untenanted. The only way in which the land- 
owners can recall the old tenants or attract new ones is by 
offering the land at the old rental, that is, abandoning the at- 
tempt to shift the tax to other shoulders. 

This result is often concealed in consequence of the fact 
that the community in which the tax is imposed is growing 
and rents are advancing because the demand for land is in- 
creasing. If the land tax is small, the rise in rent — which 
would have occurred in any case — may reimburse landlordr 
for the tax and give them the impression that they are shift- 
ing it to their tenants. What they are really doing, however, 
is paying it themselves by foregoing the absolute increase in 
the income they derive from their land, which would have 
been theirs had no land tax been imposed. The conclusion to 
which we are brought, therefore, is that a land tax must be 



552 Government Expenditures and Revenues 

paid by landowners because it tends neither to increase the 
demand for land nor to reduce the supply, and it is only by 
increasing the demand or reducing the supply that the tenants 
generally can be forced to pay higher rents. 
Capital!- § 307. The land tax has another peculiarity. Since the 

Land Taxes value of a piece of land is its rent capitalised at the current 
rate of interest, the imposition of a tax that is to be collected 
year after year reduces the value of the land by an amount 
equal to the tax capitalised at the current rate of interest. 
Generally speaking, land is looked upon as an investment and 
will command that price that makes its return equal to that 
to be obtained from other investments as indicated by the cur- 
rent rate of interest. If the government imposes an annual 
tax and thereby takes from the landowner a part of his return 
it reduces the value of the land as an investment correspond- 
ingly. As an investment the land is now v^orth the gross rent 
less the annual tax capitalised at the current rate of interest. 

{^^ , A numerical illustration mav serve to make this clearer. 

Example 

Suppose that a piece of land affords a gross rent of $6,000 a 
year, that the government imposes a tax that takes $1,000 each 
year, and that the current rate of interest is five per cent. 
Under these conditions the value of the land for investment 
purposes will be $100,000 or the sum which, if invested at the 
current rate of interest, would bring in $5,000, the net return 
from the land. If the tax is proportioned to the value of the 
land it will be at the rate of one per cent. Suppose now the 
government increases the land tax so as to take $1,200 from 
the landowner while the rate of interest remains at five per 
cent. Under these new conditions the net return from the 
land is only $4,800 and its value only $96,000. The tax rate 
is now one and one-quarter per cent. The increase in the tax 
rate by one quarter of one per cent not only lowers the an- 
nual return to the owner by the amount taken b}^ the tax 
(that is, $200) but what is more serious it lowers the value 
of his property by $4,000. He must not only pay the tax so 
long as he continues to own the land but when he sells it he 
must submit to a reduction in the price which causes him to 
pay the tax for all time. The purchaser, on the other hand, 
who acquires the land with full knowledge that the tax must 



Conclusion as to Land Taxes 553 

be paid each year suffers no deduction from his income in 
consequence of the tax. Because of the tax he obtains the 
land for $96,000 or the sum which would yield the $4,800 he 
is to receive from it each year if invested at the current rate 
of interest. If the tax had remained at the old rate he would 
have had to pay $100,000 for it. Had there been no tax at all 
it would have been worth $120,000 as the return would then 
have been the full rent, or $6,000. Thus a land tax is paid by 
the landowner upon whose land it is imposed not only while 
he continues to be owner but for all time. It amounts to a 
compulsory reduction in the value of his property, 

§ 308. With these peculiarities in mind what are we to say An Old 
of a tax on land from the point of view of the principle that Burdenless 
taxation should be in proportion to ability? The first con- 
clusion to be drawn is that no tax is less open to objection than 
an old land tax. The proceeds of such a tax are drawn from 
the rent earned by the land. After the tax has been in force 
for a number of years and the land has changed hands at 
least once at the new valuation caused by the tax, it ceases to 
impose any burden whatever upon present landowners. The 
part of the rent which it diverts to the use of the government 
is a part which they never expected to control themselves. 
The remainder affords them as large a return as they could 
have obtained from any other line of investment, and they 
are entirely satisfied with the arrangement. It is for these 
reasons that real estate owners pay their taxes with so little 
grumbling. Nothing would surprise them more than to have 
their tax rate lowered — the basis of assessment remaining the 
same — and no policy would be so unfair to other tax-payers, 
since it would amount to adding gratuitously to the value 
of land for investment purposes. 

A new or a higher land tax is a very different matter. If A New 
the population is growing and rents are going up the tax may j^^y involve 

be raised gradually without unduly burdening landowners. Confiscation 
TT J 1 • t 1- 1 , • r of Property 

Under such circumstances the higher tax merely acquires for 

the government the increase in the rent leaving the land- • 

owner's return on his investment undisturbed. If the increase 

in rent has not been anticipated by the landowner in the price 

lie paid for the land and has followed general changes in 



554 Government Expenditures and Revenues 

which he has had httle or no part its appropriation seems en- 
tirely fair. But exactly adjusting a rising- tax rate to rising 
land rents is a matter of much delicacy. What is very likely 
to happen if the land tax is raised is that it will cut into the 
income formerly enjoyed by the landlord and cause his land 
to depreciate in value. Such a policy clearly discriminates 
against landowners in comparison with owners of other sorts 
of property. Unless it is combined with other taxes in such 
a way that landowners are not singled out for exceptional 
taxation, it violates the principle that taxation should be in 
proportion to ability. 

§ 309. The effect of a tax on buildings is different from 
that of a tax on land simply because the supply of buildings 
may and in course of time will be controlled by man with a 
view to shifting the tax. When a real estate tax is first im- 
posed owners of buildings will have to bear their proportion 
of it as do owners of land. It will not cause any increase in 
the demand for buildings, nor immediately any decrease in 
their supply. But, unlike land, buildings wear out, are de- 
stroyed by fire, or for some other reason have to be replaced. 
In a progressive community there is added to the need of re- 
placing old buildings a demand for new buildings to accommo- 
date the growing population. If owners of buildings have to 
pay the tax on them — even when they own them as invest- 
ments — the erection of new buildings will be unprofitable un- 
til the lessened supply coupled with the constant or increasing 
demand causes building rents to rise so as to fully cover the 
tax. When this has occurred the erection of buildings will 
again be entered upon, the tax having been shifted from the 
building owner to the occupier. Thus the part of the real 
estate tax which falls upon buildings tends to discourage 
building operations until building rents have risen to reim- 
burse the owner for the full amount of the tax. Such taxes 
are paid, as soon as the community is fully adjusted to them, 
by occupiers or lessors rather than by owners. The question 
whether this part of the real estate tax satisfies our canon of 
fairness, thus reduces to the question whether the sort of a 
house or place of business a person occupies is a fair index 
to his ability to contribute to the support of the government. 



Corporation Taxes 555 

Generally speaking the acceptance of this basis imposes dis- 
proportionally heavy burdens on the poorer classes in the 
same way, but not to the same extent, as do other taxes fall- 
ing upon consumers. 

§ 310. Similar in effect to the tax on buildings is the tax Tax on 
on any special form of personal property that cannot be evaded pahi^by*^ 
like the tax on mortgages in some of the states. At first such Borrowers 
a tax makes investments in mortgages unprofitable as com- 
pared with untaxed investments. The balance is only restored 
when the interest on mortgages is raised by the full amount 
of the tax and the burden is shifted to borrowers. It need? 
no extended argument to prove that a tax upon borrowers in 
proportion to the extent of their indebtedness has little re- 
lation to the principle that taxation should be in proportion 
to ability. 

Even more obvious is the injustice of what remains of the Injustice of 
general property tax, that is, the tax on highly scrupulous Tax on^ 
personal property owners, who obey the law literally, while Personal 
their friends and neighbours take advantage of the many easy 
means of evasion. This portion of the tax violates every 
principle of fairness and reasonableness and brings the whole 
general property tax of which it is a part into merited dis- ' 

repute. . ' 

To sum up our conclusions in reference to the general ConclusJ'^ns 
property tax : That part which falls upon land, if the tax has 
been long in operation is paid out of rent and is virtually 
burdenless to present landowners ; if the tax is new, on 
the other hand, unless it is exactly adjusted to gradually 
rising rents, this part imposes a special burden on landowners 
which is only fair if other individua,ls are similarly burdened 
at the same time. That part which falls upon buildings or 
any other special form of investment while other forms of 
investment are permitted to escape falls upon the occupier or 
borrower as distinguished from the owner or lender. Finally 
that part which penalises honesty, unlike the rain, falls upon 
the just, but not upon the unjust. 

§ 311. Corporation taxes, the next important source of Corporatkoa 
state revenue, are of various kinds. We may distinguish in- 
corporation or license taxes, franchise taxes, taxes on the 



55^ Government Expenditures and Revenues 

capital stock and bonded debt, gross receipts taxes, net income 
taxes, and special franchise taxes. 

The incorporation or license tax is the tax paid for the 
privilege of incorporation. In most of the states, it is merely 
a fee; but in a few like New Jersey whose corporation laws 
are so drawn as to attract organisers of corporations from 
other states, it is an important source of revenue. It is borne 
by the corporation which pays it and is universally approved 
as fair and reasonable. 

The franchise tax is a tax on a corporation as a going con- 
cern. As distinguished from the incorporation tax it is a 
payment for the right to do rather than merely to he. In 
order to assess the franchise it is necessary to adopt some 
criterion of its value and consequently this tax merges into 
the more specific methods of taxing corporations next to be 
described. The legal conception of a franchise tax has been of 
the greatest importance in the United States because under it 
the courts have sustained a number of different ways of tax- 
ing corporations which would hardly have been approved If 
looked upon merely as ways of taxing property or income. 

Inability to reach the stocks and bonds of corporations in 
the hands of their owners through the general property tax 
has caused the states in which corporate enterprises are most 
highly developed to seek for other methods of attaining the 
same end. The plan most commonly adopted is to tax the cor- 
porations themselves, while exempting their securities in the 
hands of owners. The first step in this direction is usually 
the capital stock tax. It is a tax on the actual value of the 
capital of a corporation, determined by a board of state 
assessors, deduction being allowed usually for real estate, 
which is assessed and taxed locally, and sometimes for bonded 
and other indebtedness, which in such cases usually escapes 
taxation altogether. In its most highly developed and most 
defensible form, it is a tax on the capital stock, whose value 
is determined by the prices at which its shares are selling, and 
the bonded indebtedness. The aggregate value of the stock 
and bonds of a corporation represent its worth as a going 
concern from the point of view of the business community 
and constitute therefore the fairest basis for measuring its 



Gross Receipts Taxes 557 

ability to contribute to the government, so long as property is 
accepted as the test of such ability. On this point there has 
been a good deal of confusion in the decisions of the courts. 
Misled by the analogy of private indebtedness judges have 
sometimes held that the bonds as indications of debt should be 
subtracted from the value of the stock to determine the value 
of the corporation, just as the debts of an individual are 
properly deducted from his assets to determine what he is 
worth. But the bondholders of a corporation are really part 
owners in the corporation. In fact it not infrequently hap- 
pens that their bonds represent the v^^hole value of the cor- 
poration, the stock having merely a nominal value. The stock- 
holders' interest in turn is an interest in what is left after the 
claim of the bondholders has been satisfied. Thus the cri- 
terion of the taxable ability of a corporation is not stock less 
bonds, but stock and bonds. 

A tax on the capital stock and bonded indebtedness of cor- Advantages 
porations, exemption of these forms of personal property in Bond^aud 
the hands of owners being, of course, allowed, goes far to- Stock 
wards correcting one of the most glaring abuses of the general 
property tax. Such a tax, if applying to all corporations, 
serves no doubt to lessen the attractiveness of the corporate 
form of organisation to investors and to lead them to prefer 
at times the partnership or individual entrepreneur forms un- 
der which evasion of the property tax is comparatively easy. 
This, however, is a small matter in comparison with the ad- 
vantages of such taxation. It falls equally upon all of those 
who avail themselves of the privilege of incorporation and it 
prevents that privilege from being too lightly embraced. It 
brings in large revenues to the state treasuries and enables 
them to dispense with other and less defensible taxes. Finally 
it is a step away from the outgrown general property tax in 
the direction of dependence upon special privilege taxes that 
can be easily and fairly assessed and collected. 

§ 312. Gross receipts taxes are another form of corporate Gross 
taxation that has come into being in consequence of the Taxes 
feeling that these organisations escape their fair share of the 
tax burden. They have been applied in different states to 
insurance companies, express and railway companies, and 



Taxes 



558 Government Expenditures and Revenues 

street railway companies. The principal justification for 
them is the comparative ease with which they may be assessed 
and collected and the large revenues which they may be made 
to yield. From the point of view of fairness in apportioning 
tax burdens not much is to be urged in their favour. The test 
of ability to pay taxes is not gross receipts but net income. Of 
the former one company may be required to spend nine-tenths 
upon expenses of operation while another company spends 
only three-fourths. It is what is left in both cases that meas- 
ures tax paying ability, not the gross returns. This objection 
has less force when applied to businesses like that of insurance 
in which the relation betv/een gross receipts and net income is 
fairly constant. When limited to businesses of this sort and 
made to apply at a rate determined by the ascertained relation 
between gross receipts and net income in typical instances, 
the administrative advantages of the tax probably justify its 
existence. 
Net Income § 313. The reasons for the adoption of the gross receipts 
tax become evident from a study of the history of the next 
form of corporate tax, that on net income. This tax has also 
been applied to insurance and transportation companies by 
different states. It assumes a variety of forms sometimes ap- 
plying to the whole net income, sometimes only to that part 
distributed as dividends above a certain rate per cent. A tax 
on the net income or earnings of corporations w^ould seem at 
first thought an ideal method of compelling them to contrib- 
ute to the government in proportion to their ability. It is out 
of the net income that interest and dividends are paid to invest- 
ors and it is these that measure tax paying faculty. The diffi- 
culty is that in practice it is found impossible to prevent cor- 
porations from concealing their true net earnings when the 
tax system offers them a strong inducement to do so. They 
may do this by charging off each year outlays for enlargement 
and betterment of plant, which really represent new invest- 
ments, by paying higher salaries, etc., than market conditions 
require, or by deliberate fraud in making their reports to tax 
assessors. Unless coupled with a more rigid supervision of 
methods of accounting than has yet been adopted in the United 
States the net income tax, though so fair on its face, is really 



The Special Franchise Tax 559 

a highly unsatisfactory source of revenue. It is distinctly in- 
ferior as a means of gauging tax paying ability to the com- 
bined capital-stock and bonded-debt test. 

§ 314. The special franchise tax is a tax upon those cor- The Special 
porations which enjoy peculiar privileges in connection with Tax^of ^New 
the use of the streets or other public property. As developed York State 
in New York State it subjects such special franchises to taxa- 
tion as real estate and is thus a part, though a peculiar part, of 
the general property tax. The history of this tax is interest- 
ing. As is well known few corporations have proved so suc- 
cessful as those described as public service corporations, that 
is, gas, electric lighting, street railway, telephone, and analo- 
gous companies. Under the old law these corporations were 
subject to the general property tax like individuals, that is, 
to a tax on their real estate and tangible personalty. When 
the attempt was made, however, to tax them also on their 
franchise privileges, which had become enormously valuable, 
on the ground that these also were a form of personal property, 
the courts held that they were not personal property for pur- 
poses of taxation. In this dilemma the legislature of New 
York State passed in 1899 the so-called Ford Special Fran- 
chise Tax law, which declared special franchises real estate 
and directed the state board of tax assessors to assess them as 
such. After a long legal contest the act was sustained not only 
by the courts of the State of New York, but by the United 
States Supreme Court. As the propriety of taxing these special 
privileges as they become valuable along with other property 
is generally conceded, New York's plan is very likely to be 
followed by other states. This lends more than local interest 
to the question of the effect of such taxes. 

Like the tax on land a tax on the value of a special and Its Resem- 
exclusive franchise must be paid by the owner of the fran- Land%ax^ 
chise. The imposition of the tax alters in no respect the terms 
on which he renders his service to the community nor the 
price which he receives for that service, and consequently it 
cannot be shifted. Moreover, like the tax on land the special 
franchise tax is capitalised at the current rate of interest and 
deducted from the value of the franchise as an investment. 
Thus the whole burden resulting from making special fran- 



560 Government Expenditures and Revenues 

chises subject for the first time to taxation at the rate appl3dng 
to other property falls upon the investors interested in special 
franchise corporations at the time the tax goes into force. 
After the value of the securities of such companies is read- 
justed to the new conditions they pass to new owners at prices 
that make full allowance for the tax and consequently the tax 
is not felt by such new owners as a burden. We thus have 
here another instance of a tax that becomes virtually burden- 
less as it becomes old. 

In other states than New York special franchises may be 
taxed as personal property, if the courts approve, or under 
franchise taxes applying expressly and exclusively to them. 
But however they may be designated the same reasoning ap- 
plies to them as to taxes on land. When first levied they are 
capitalised and impose a serious burden on the franchise 
owners. As time goes on and new owners acquire the fran- 
chises they become burdenless, so far as investors are con- 
cerned. 

§ 315. License taxes have received their highest develop- 
ment in the United States in connection with efforts to control 
the liquor traffic. Beginning as moderate charges for the 
privilege of engaging in the liquor business they have grown 
until now under the high license system in force in the larger 
cities they require the annual payment of $1,000 or more for 
the privilege of maintaining a saloon, and of proportionate 
amounts for that of engaging in other branches of the liquor 
business. Space will not permit an exhaustive consideration 
of the effect of high license taxes but a few of their advan- 
tages may be emphasised. They are easily assessed and col- 
lected and they have proved a source of large revenue. They 
compel concentration of the business affected into fewer es- 
tablishments and this makes supervision easier and more effi- 
cient. The economies resulting from this concentration are 
so great that it may be doubted whether they lessen greatly 
the profit of those obtaining licenses on the one hand or add 
appreciably to the prices charged for the commodities sold 
under the license system on the other. Retail trade, whether in 
liquors, or in drugs, milk, ice, groceries, provisions, or even 
merchandise, is strikingly wasteful when exposed to the effects 



Inheritance Taxes 5^1. 

of an unregulated competition. The needless multiplication of 
stocks and selling places, the reckless entry into the field of 
men with little capital and less experience due to the feeling 
that " any one can keep a store " and the losses which result 
owing to the fact that only competent persons can make store- 
keeping pay, the costly duplication of distributing machinery, 
— all these aspects of retail trade supply telling arguments 
against a competitive organisation of industry. The high 
license system, although not primarily intended for that pur- 
pose, substitutes regulated for unregulated competition. It is 
believed to be within the truth to claim that more than half of 
the revenue that the government derives from license taxes is 
wealth that without the moderate regulation the system im- 
poses would have been wasted in a vain competition. The inci- 
dence of the remainder of the tax is similar to that of excise or 
customs taxes. In the case of liquor licenses a part of it is 
probably borne by the holder of the license and part of it by 
the consuming public in the slightly higher prices they are re- 
quired to pay for the same quantity and quality of liquor. 

§ 316. Inheritance taxes are becoming a very common inheritance 
source of revenue in the United States as they have long been Taxes 
in Europe. The question who pays them can be an- 
swered with ease and certainty, as they present no possibiHty 
of shifting. They must lessen the inheritance and in this way 
fall upon the heir. Their payment, unless they are excessive, 
will not usually, however, be looked upon as a burden. Those 
who inherit property usually need the protection of the govern 
ment against the pretensions of other claimants. Theii 
thoughts are naturally fixed on the share of the inheritance 
that is to come to them, and if the inheritance tax is an es- 
tablished institution they are apt to accept it as a fair means 
of compensating the state for its part in securing to them 
whatever may be left. Inheritance taxes thus combine in 
unusual degree the characteristics of a good form of taxation : 
they may be easily and fairly assessed and collected; they 
cannot be shifted and consequent!}'- have no tendency to in- 
terfere with business relations ; they impose little or no felt 
burden upon those out of whose inheritances they are paid. 
The principal difficulty that arises in connection with their 



562 Government Expenditures and Revenues 

use is to decide at what rate they should be imposed. On this 
point, as is explained in the next chaj)ter, the practices of 
different countries vary widely. 

REFERENCES FOR COLLATERAL READING 

The standard American treatise on public finance is * Adams's The 
Science of Finance. Equally authoritative for the financial system 
of the United Kingdom is Bastable's Public Finance. In connection 
•with these volumes should be read the special treatises on taxation 
by Seligman entitled: *The Shifting and Incidence of Taxation. 
•Essays in Taxation; and Progressive Taxation. More elementary 
treatises also written with special reference to American conditions 
are: Daniels's Elements of Finance and Plehn's Introduction to 
Public Finance. 



CHAPTER XXYIII 
TAXATION AND TAX REFORM IN THE UNITED STATES 

§ 317. Before attempting to discuss the effect upon the dis- Practical 
tribution of wealth of the various taxes considered in the last Taxation* 
chapter and to formulate suggestions for the reform of the 
taxing system of the United States, it will be well to review 
very briefly some of the practical aspects of the more important 
taxes now in operation. 

The tariff system of the United States has already been dis- The Tariff 
cussed at some length,* In its present form it may be fairly united 
characterised as a plan by which the machinery of taxation is States 
employed for industrial rather than for fiscal purposes. From 
the point of view of public revenue it is open to criticism be- 
cause the burden which it imposes upon tax-payers is out of 
all proportion to the income which it affords the government. 
This results from the fact that the principal, and of course 
deliberately intended, effect of the tariff is to force consumers 
to buy, not foreign goods subject to the duties, but domestic 
products enhanced in price because of the duties. This, it need 
hardly be said, is no conclusive argument against the tariff', 
but it makes its discussion merely as a plan of taxation en- 
tirely profitless. 

From the point of view of revenue customs duties are now Customs 
just about as productive in the United States as internal Revenue 

revenue duties. Thus during the ten years 1895 to 1904 cus- Duties 

1 . . -, , , ^ ■ ^ Compared 

toms duties yielded on an average $2 1 1 ,600,000 a year as com- 
pared with $221,900,000 from internal revenue taxes.f Because 
of the complexity of the customs tariff" system the cost of col- 
lecting these duties as reported by the Secretary of the Treas- 

* Cf. Chapter XX. 

f During a part of this time the so-called war internal revenue duties 
imposed in connection with the short Spanish-American war were in 
force, so it may be inferred that the two sources of revenue are about 
equally important. 

563 



564 Taxation and Tax Reform 

ury averages nearly double the cost of collecting the internal 
revenue duties. Thus for the fiscal year ending June 30, 1904, 
the cost of collecting the former equalled ^.^ per cent of the 
receipts and of the latter 1.9 per cent of the receipts. 
Advantages § 318. The internal revenue system of the United States is 
Revenue^ one of the most valuable fruits of the extraordinary financial 
System expedients made necessary by the country's wars. Its proved 

efficiency and economy as a means of raising revenue now 
assure it a permanent place in the taxing system of the country 
and also throw upon it the burden of providing additional 
revenue to meet emergencies such as that presented by 
the recent Spanish-American war. Under the law in force 
July I, 1905, the principal commodities subject to internal 
revenue duties w^ere : distilled spirits, manufactured tobacco, 
fermented liquors, oleomargarine, filled cheese, mixed flour, 
and adulterated butter. Of these only the first three are taxed 
primarily for revenue purposes and from them is derived more 
than nine-tenths of the revenue received. The remarkable 
productiveness of these taxes on liquors and tobacco dem- 
onstrates the ease with which all the revenue that the country 
requires from customs duties might be obtained from taxes 
on these same commodities and on the few important articles 
that are not produced in the United States in appreciable quan- 
tities, such as coffee and tea. 

One reason for the success of the internal revenue system 
is the very simple stamp device by means of which the taxes 
are collected. This was inLroduced by the act of July 20, 1868, 
which required revenue stamps to be purchased from the 
government and to be attached to commodities subject to the 
tax in such a way that they must be broken when the package 
or barrel was opened. By this simple means every citizen is 
put in a position to knovi^ whether the articles that come under 
his notice have satisfied the requirements of the law and to 
act as an efficient assistant of the tax collector. 
Tlie Sub- § 3^9- As already stated the general property tax is the 

stitution of chief source of state and local revenues in most of the states. 

Corporation ^. . . 1 , , . 1 

Taxes for i here IS however a marked tendency m such states as New 

die General York, Massachusetts, Pennsylvania, and New Jersey to relin- 
Tax quish this source of income to the local governing bodies, tlie 



Unequal Assessments 565 

states depending for their revenues upon corporationj inheri- 
tance, and license taxes. One reason for this change has al- 
ready been touched upon. With the great increase of cor- 
porate wealth and corporate securities which so readily evade 
taxation in the hands of holders, public opinion has de- 
manded the introduction of taxes applying directly to corpo- 
rations. As these have been developed they have served so 
well as sources of revenue that the more highly organised in- 
dustrial states have been able to forego the income formerly 
derived from the general property tax. 

Another reason has been the fact that the general property Unequal 
tax has proved even more unfair as a source of state than as a meats 
source of local revenue. The assessment of this tax calls for 
intimate knowledge of local conditions and has consequently 
been intrusted to local assessors. When the assessments of the 
latter have determined the proportion of state taxes paid by 
the locality, they have been under a strong temptation to under- 
value property in their districts so that the tax bills of their 
friends and neighbours may be lower. Wide discrepancies 
have thus appeared betvv^een the actual and the assessed value 
of property. According to a careful report prepared by the 
Pennsylvania Tax Conference referring to the years 1891 and 
1892 the assessed value of real estate in the different counties 
of that state varied all the way from only 20 per cent (Lucerne 
County) to 93 per cent (Northumberland) of the market 
value as indicated by actual sales. This is fairly typical of 
the situation produced in all of the states by the policy of 
depending upon local assessors to assess property for purposes 
of state taxation. To lessen the great injustice that would 
result from unequal assessments most of the states have created 
state boards of equalisation whose task it is to make the assess- 
ments uniform. Notwithstanding the usuall}/- efficient work 
of these boards inequalities have persisted and the abandon- 
ment of the general property tax for state purposes has proved 
the only certain way to correct the evil. 

In New Jersey and Pennsylvania the states have desisted 
altogether from taxing real estate for state purposes and in 
Pennsylvania the larger part of the proceeds of the personal 
property tax still collected is returned to the counties and cities 



566 



Taxation and Tax Reform 



which collect it. In New York the constitution requires the 
imposition by the state of the general property tax, to provide a 
sinking fund for the canal bonds outstanding. The rate, how- 
ever, has been reduced to the lowest point permitted by this 
constitutional restriction (that is, 13-100 of a mill) so the tax 
has ceased to be of any special consequence to the state govern- 
ment. 

§ 320. Although the general property tax is thus losing its 
importance as a source of state revenue, its position as the 
mainstay and dependence of local governing bodies is un- 
shaken. In view of the larger revenues needed by local gov- 
ernments and especially by the cities, this makes the inequali- 
ties inherent in this form of taxation the more glaring. The 
tax rates imposed in different cities range all the way from 
one to three per cent. In New York City the rate, which was 
for many years over two per cent, has been lowered as a result 
of the introduction of the special franchise tax and of the 
system of assessing real estate at its full value instead of at 
only 65 per cent of its value as formerly until it is now (1905) 
about one and one-half per cent. Even this rate if applied as 
the law requires to such personal property as railroad bonds 
would in some cases take from the tax-payer nearly one-half 
of his income. No one would think seriously of defending an 
income tax which imposed such a heavy burden as this upon 
tax-payers and it is partly because the tax is felt to be so dis- 
proportionally high on those owners of personal property who 
pay it that public opinion fails to condemn very severely those 
who do not. Thus the wholesale evasion of the tax by the vast 
majority of owners of personal property makes the assessed 
value of such property but a fraction of the actual value. 
The low assessment in turn necessitates a high rate of taxation 
if the needed revenue is to be secured. This high rate is an 
obvious injustice to those who are conscientious about paying 
the tax and serves to increase the number who determine to 
evade it altogether. This is the vicious circle in which the at- 
tempt to tax personal property has involved most American 
communities and there is no way of escape from it short of 
the frank abandonment of this species of taxation. 

§ 321. The present financial system of the State of New 



Corporation Taxes 567 

York is fairl}' typical of the form which state finances seem The Taxing 
likely to assume all over the country. During the year ending N^^'^York 
September 30, 1904, the income of the state from all sources State 
equalled $25,500,000 and of this sum $21,500,000, or nearly 85 
per cent, was derived from three sources : the taxes on cor- 
porations ($7,030,000), the tax on inheritances ($5,430,000), 
and liquor license taxes ($9,040,000).* 

The taxes imposed on corporations are usually described as Corporattoti 
franchise taxes, but assume a great variety of forms. The 
principal taxes in force January i, 1905, were: 

(i) An incorporation tax of one-twentieth of one per cent 
of the authorised capital. 

(2) A general corporation or franchise tax equal to one- 
quarter of a mill for each one per cent of dividends declared 
on capital stock employed within the state if such dividends 
equal or exceed six per cent of the par value of such capital 
stock. Tf the dividends are below six per cent the tax is one 
and one-half mills on the value of the capital stock employed 
in the state. 

(3) A tax of one per cent on the capital and surplus of banks 
and trust companies and on the surplus and undivided profits 
of savings banks. 

(4) A tax of one per cent on the gross premiums of in- 
surance companies. 

(5) A tax of one-half of one per cent on the gross receipts 
from business done within the state of steam surface railroad, 
canal steamboat, ferry, express, navigation, pipe line, transfer, 
baggage express, telegraph, telephone, palace car, and sleeping 
car companies and other corporations engaged in transporta- 
tion and not enumerated under (6), 

(6) A tax of one per cent on the gross receipts of elevated 
and surface railroads not operated by steam, and water, gas, 
and electric lighting, heating, and power companies, plus a tax 
of three per cent on the dividends in excess of four per cent 
on the paid-in capital declared by such companies. 

It will be seen that these taxes impose considerable burdens 

* In 1905 the state legislature added two new taxes: a stamp duty of 
two cents on every share of stock sold and a tax of one-half of one per 
cent on mortgages. It is doubtful, however, whether either of these 
■will be retained as permanent features of the taxing system. 



568 Taxation and Tax Reform 

upon all classes of corporate enterprises. The chief respect in 
which they are open to criticism is in accepting gross receipts 
as an indication of tax paying ability and in failing to provide 
for the taxation of the bonds of corporations. A fairer plan 
of taxation would be that already referred to which takes the 
business man's valuation of the whole corporate enterprise as 
indicated by the current prices of its bonds and stocks as the 
criterion of tax paying ability and taxes it at a uniform rate. 
This plan has been sanctioned by the courts even in connection 
with the taxation of corporations engaged in interstate com- 
merce when som.e reasonable plan {e. g., proportional mileage 
within the state) for determining what part of this value is 
located within the state has been adopted. Besides affording 
a fairer basis of assessment, this plan has the merit of taxing 
investors interested in corporations as owners of bonds as well 
as stock holders. Under the New York system the former still 
escape all taxation, except when they conscientiously return 
their bonds for the personal property tax. This is unjust 
whether regarded from the point of view of the majority who 
evade the tax or that small minority which pays it. 
The Special § 322. In addition to the corporation taxes that have been 
Tax described, New York has the peculiar tax on special franchises 

as real estate discussed in a previous section. Although of no 
great importance as a source of state revenue, since the state 
tax on general property is no\v so small, this has proved a very 
valuable resource for the cities of the state. Its importance 
for New York City alone may be judged from the fact that 
the assessed value of the special franchises of the public ser- 
vice corporations making use of its streets in 1905 was fixed at 
$302,000,000. With a tax rate of one and one-half per cent 
this means a yield of $4,500,000 unless some of the assessments 
are reduced on appeal. Adding this to the taxes paid by these 
same companies on their real estate and directlv to the state 
as ordinary franchise taxes, it appears that considerable prog- 
ress has been made toward making these monopolistic busi- 
nesses bear their proportion of the tax burden. 
Inheritance § 323. The first inheritance tax imposed by an American 
United state was through an act passed by the legislature of Pennsyl- 

States vania in 1826. It applied only to collateral inheritances as 



Inheritance Taxes 569 

do the inheritance taxes now imposed by sixteen of the thirty 
states which have availed themselves of this source of revenue. 
As now levied inheritance taxes assume all degrees of com- 
plexity from the simple tax of five per cent on all inheritances 
passing to collateral heirs and strangers in blood of Virginia, 
Missouri, and Arkansas, three of the states which do not tax 
direct inheritances at all, to the elaborate classified tax adopted 
by the legislature of Wisconsin in 1903. The latter distin- 
guishes five classes of heirs and makes them subject to taxes 
progressing, in the case of direct heirs^ from one per cent to 
three per cent, and in the case of collateral heirs and strangers 
in blood from five per cent to fifteen per cent according to the 
size of the estate. Exem.ptions of varying amounts ranging 
from $100 in case of the last class to $10,000 in the case of 
widows are also allowed. From the point of view of revenue 
the inheritance tax of New York, which is at the rate of one 
per cent on estates above $10,000 passing to direct heirs and 
to brothers and sisters and sons and daughters-in-law, and at 
the rate of five per cent on other inheritances above $500, is 
most productive, realising for the state treasury from four to 
six million dollars annually. The only other state which de- 
rives as much as a million dollars a year from this source — the 
productiveness of Wisconsin's tax not yet having been fully 
tested — is Pennsylvania. 

Comparing these results with those attained in foreign coun- And 
tries which tax inheritances, it v/ould appear that the United 
States has only just begun to test the possibilities of this form 
of taxation. Great Britain in 1900, a fairly typical year, de- 
rived a revenue of some $92,000,000 from her different taxes 
on inheritances, or nearly one-fifth of her total national revenue 
from taxation. France obtains from this source some $40,- 
000,000 annually or about nine per cent of her national revenue, 
exclusive of that from the state monopolies. Even more sig- 
nificant is a comparison of the per capita returns from these 
taxes in different countries. A table prepared by Professor 
Millis * comparing the returns from inheritance taxes for the 
years 1899 to 1901 shows that Great Britian derives some $2 
per capita annually from this source and France over $1. The 
* Quarterly Journal of Econotm'cs, Vol. XIX. , p. 308. 



Abroad 



570 Taxation and Tax Reform 

per capita return for New York State, on the other hand, was 
only forty-nine cents, for Pennsylvania twenty cents, and for 
the majority of the states which have inheritance taxes less 
than ten cents. 
|ustification The principal reason for the larger returns of these taxes in 
^essive Great Britain and France is that both apply the progressive 
^ates principle in somewhat the same way as does the Wisconsin law. 

Thus the highest rate in Great Britain on very large estates 
passing to distant relatives or strangers in blood is 19 1-2 per 
cent and the highest rate in France 20 1-2, These rates are 
justified on two grounds. First, it is asserted that from the 
point of view of the heir it is not what the government takes 
but what is left that is significant and that when the estate is 
large the government may take even one-fifth of the whole 
amount vvrithout imposing too heavy a burden. Second, it is 
believed that from the point of view of the testator the pros- 
pect of leaving property to distant relatives or strangers plays 
but a small role as a motive to accumulation and that, con- 
sequently, such progressive rates have little or no tendency to 
discourage saving, 
laheritance § 324. The validity of the first justification will hardly be 
pose Slight questioned when the relation of the state to property left at 
wiy^r" °" death is considered. Such property does not belong by abso- 
lute right to any one. In modern communities the right of 
disposing of property after death is recognised and protected 
but always under definite limitations designed to promote the 
general well-being.* Wives have certain rights in the estates 
of their husbands of which they cannot be deprived by will. In 
most countries children also have certain rights which the state 
undertakes to safeguard. The law properly protects the owner 
of property in its full enjoyment during his lifetime, even to 
the extent of putting no obstacle in his way if he wishes to 
distribute it among his family or friends before his death. 
When he dies, however, the disposition of the property which 
he preferred to retain as his own to the very end assumes large 

• This right is essentially modern. It is not necessary to go back 
very far in the evolution of law to find property left at death reverting 
to the state or ruler as a matter of course. Cf., Ely, Evolution of In- 
dustrial Society, Chapter on Inheritance Taxes. 



Heirs 



Merits of Inheritance Taxes 57 1 

social significance. No one now has a claim upon it compar- 
able from the social or legal point of view with that which has 
been dissolved by the death of the owner. But his " dead 
hand " cannot be permitted to determine what shall become of 
it regardless of the interests of the living. In fact the interests 
of the living are now the paramount consideration. The heirs 
designated in the will of the deceased, if he has made a will, 
are entitled to receive that part and only that part of the estate 
which the law permits. If he has made no will then the ques- 
tion of the division of the propert}^ is one for the law alone to 
determine. The imposition of an inheritance tax is simply the 
assertion by the state of a right to a share in property left at 
death under the conditions set forth in the tax law. If the share 
taken by the state is moderate, there is every reason to think that 
the heirs will accept it as a matter of course and think grate- 
fully of the part that is left to themselves rather than grudg- 
ingly of the part which they do not receive. There thus ap- 
pears to be good ground for the claim that moderate inheri- 
tance taxes increasing from one per cent on inheritances above 
a certain amount left to direct heirs even to as much as twenty 
per cent on very large estates passing to collateral heirs or 
strangers do not impose a burden that is consciously felt by 
any one. They certainly do not impose a burden on the tes- 
tator as he is dead ; almost as certainly they do not impose a 
burden upon the heir as he is usually too much interested in 
what he receives to feel the loss of the portion retained by the 
government. 

The second contention, that is, that moderate taxes of this ^^J?^ 
kind do not discourage the accumulation of property, must 
be accepted with some qualifications. What may be claimed 
with confidence is that the discouragement will be too slight 
to offset to any considerable degree the fiscal advantages of 
such taxes. The motives that lead to the accumulation of 
property are strong and are each year growing stronger. 
There is little danger that moderate taxes imposed upon inheri- 
tances will retard appreciably the accumulation of the fund of 
capital upon which the efficiency of industrial processes so 
largely depends. Thus from every point of view the taxation 
of inheritances, if not pushed too far, appears to satisfy the 



572 



Taxation and Tax Reform 



The Income 
Tax in the 
United 
Kingdom 



requirements of just and reasonable taxation. Such taxes are 
easy to assess and collect. They cannot be shifted and yet 
they impose little or no burden upon those whose inheritances 
are lessened in consequence of their existence. Finally, they 
have no bad effects upon industrial society, comparable with 
the revenue which they afford to the state. Under these cir- 
cumstances it is not surprising that they are coming to be 
important sources of income in nearly all progressive countries. 

§ 325. In addition to the taxes which have been discussed 
there is one which merits serious consideration because of the 
prominent place it occupies abroad, that is, the income tax. 
The similarity between the two countries makes the operation 
of this tax in the United Kingdom of most interest to students 
of taxation in the United States. As there assessed it is a tax 
at a uniform rate on incomes from all sources, the latter being 
classified for convenience of assessment under five schedules. 
One of its principal characteristics from the point of view of 
administration is the full use made of the device known as 
" stoppage at the source." For example, the tax is deducted 
from the salaries of public officials and from the interest on the 
public debt before payment is made to those entitled to receive 
income from these sources. Again, corporations are required 
to deduct the tax from the interest and dividends which they 
pay to their bond and share holders. Finally, even the financial 
agents who collect incomes from the bonds or stocks of foreign 
corporations are required to report the amounts collected and 
the names of their clients to the government before they sur- 
render the income to those to vv'hom it belongs. 

Notwithstanding the high development of this method of 
taxing the income as it arises, there are certain sorts of income 
that can only be assessed on the basis of the personal declara- 
tion of the recipient. This is the case to a large extent as 
regards income from foreign investments and almost wholly 
as regards income from " trades and professions." It is in 
connection with the assessment of these incom.es that the in- 
come tax is least saiisfactor}'-. What proportion escapes assess- 
ment can only be guessed at, but all authorities agree that it 
is considerable. Thus, according to the estimate of Sir Robert 
Giffen the returns from foreign investments received by in- 



The British Income Tax 573 

habitants of tlie United Kingdom equalled in 1882 some 
seventy-five and in 1885 some eighty-five million pounds ster- 
ling. The returns assessed under the income tax in these years 
amounted to only thirty and thirty-five million pounds respec- 
tively. The same authority estimates that in 1885 only about 
eighty-five per cent of the incomes from trades and professions 
which were subject to the income tax were honestly reported. 
Although it is impossible to say what proportion of the total 
income evades taxation, it is probably well within the truth to 
put it at ten per cent.* Since, however, these evasions include 
a variety of incomes there is no reason to think that they in- 
volve any shifting of the tax on the part of those who do pay 
it;, as would be the case if incomes from some one special trade 
or profession escaped while incomes from all other source:-; 
were taxed. 

§ 326. From the point of view of revenue the income tax is Revenue 
an important part of the British fiscal system not only because income Tax 
it yields in ordinary years from one-sixth to one-seventh of 
the entire imperial income, but because in time of emergency 
its yield can be largely increased by simply adding to the rate 
of taxation. This characteristic of the tax is so highly appre- 
ciated that it is now voted afresh each year at just that rate 
which the fiscal requirements of the government make desir- 
able. It thus serves to give flexibility to the public revenues 
and to make possible a more exact balancing of revenues and 
expenditures than can be attained by countries which are with- 
out some such elastic source of income. The tax is so drafted 
as to allow only moderate exemptions — in 1904 an exemption 
of $800 on incomes under $2,000, of $750 on incomes between 
$2,000 and $2,500, of $600 on incomes between $2,500 and 
$3,000 and of $350 on incomes between $3,000 and $3,500, but 
no exemption on incomes above $3,500. The rate has varied 
considerably in recent years in consequence of the extraordinary 
expenditures necessitated by the Boer War. For the six years 
1895 to 1900 it was maintained at eight pence in the pound 
{that is, 3 1-3 per cent). In 1901 it was advanced to one shil- 
ling in the pound, or five per cent, and it has since (in 1903) 
been as high as one shilling, three pence in the pound, or 6 1-4 
* Cf., Hill, The English Income Tax, pp. 382-387. 



574 Taxation and Tax Reform 

per cent. In the latter year the tax brought in nearly one- 
fourth of the entire imperial revenue ; and it is a clear evidence 
of the efficiency of the administrative machinery by which it 
is assessed that there was no perceptible increase in the extent 
to which the tax was evaded, notwithstanding the unusually 
high rate of taxation. 
State § 227. In the United States income taxes have been em- 

Taxes ployed by both the state and the federal governments. Alto- 

gether some sixteen states have imposed this tax at some period 
of their history, but of these only six continued to use it Jan- 
uary I, 1903.* The principal defect in the tax as a state tax 
is that it is impossible to assess it fairly and that when it 
is imposed it has a tendency to drive persons with large incomes 
into other states where no such tax is found. It seems clear 
from American experience that such a tax must be national in 
its scope, if it is to be even approximately just in its practical 
operation. 
The Federal Reference has already been made to the country's experience 
Income Tax ^^^j^j^ ^ federal income tax. During the Civil War when Con- 
gress was making use of every possible form of taxation an 
income tax was imposed which was continued in force from 
!i863 to 1873. Although somewhat crudely devised and never 
very efficiently administered this tax brought into the Treasury 
in 1866, the year of largest yield, nearly $73,000,000, On the 
strength of this experience the tariff-reforming Congress 
elected in 1892 included an income tax as a prominent feature 
of the revenue law passed two years later and commonly re- 
ferred to as the Wilson Act. This tax was at the uniform rate 
of two per cent and applied to the net incomes of corporations 
as well as to those of individuals. The latter were allowed an 
exemption of $4,000, It was thus practically a tax on the well- 
to-do from which persons in moderate circumstances were 
exempt — except as they were investors in corporate enterprises 
— and was justified on the ground that other federal taxes, 
that is, customs and excise duties, fall chiefly on the poor. 
The Income How successful this tax might have been as a means of rais- 
Unconstitu- i»g revenue will never be known, since it was declared uncon- 
tional * Cf., Kinsman, The Income Tax in the Commonwealihs of the 

United States, pp. no et seq. 



A Federal Income Tax 575 

stitutional by the Supreme Court of the United States during 

the first year of its operation on the ground that it was a 

" direct " tax in the constitutional sense and must therefore be 

apportioned, if imposed at all, according to the population. 

Prior to 1895, in interpreting the clause of the Constitution 

requiring that direct taxes shall be laid in proportion to the 

population the Court had held that direct taxes meant the taxes 

known as direct when the Constitution was adopted, that is, 

poll and land taxes. On the basis of this view it had sustained 

the income tax of the Civil War period. The reversal of 

opinion was by a divided bench and has been criticised not 

only by persons who favour a federal income tax and may 

therefore be considered prejudiced, bat by eminent lawyers 

who oppose it but who think that the older view of the Court 

was more in hannony with correct principles of constitutional 

interpretation. Since the Supreme Court has reversed itself 

once on the question of the constitutionality of an income tax it 

is at least within the bounds of possibility that it may do so 

again, so the discussion of the desirability of such a tax for 

the United States is still not an altogether profitless exercise. 

§ 328. The principal arguments in favour of a federal income Arguments 

tax are the fairness of such a tax in itself, the success of such °^,^f "s|. ^ 

taxes in the United Kingdom, Prussia, and other European Federal In- 

r ,1 . -11 r 11 r come Tax 

States, and the need of a tax that will fall on persons 01 

substance as a supplement to the customs duties and excise 
taxes already imposed which fall so largely on the wage- 
earning class. To these arguments must be opposed the 
following considerations. The fairness of an income tax is 
contingent on the accuracy with which it is assessed and col- 
lected. Unless it can be shown that evasions will be few and 
infrequent it may reasonably be held that in practice such a 
tax will be extremely unfair. Neither the experience of the 
United States with the income tax during and after the Civil 
War nor a consideration of the conditions that are necessary 
to the accurate assessment of this tax is especially favourable, 
to its re-introduction. Nor is the experience of other govern- 
ments with the income tax of much weight as an argument in 
its favour. A system of taxation that would suit very well 
small and homogeneous countries like the United Kingdom or 



576 Taxation and Tax Reform 

Prussia might be quite unworkable in the United States. 
There is not only the immensely greater area of the country 
to be taken into account, but the diversity of business condi- 
tions and of public opinion in reference to federal taxation. 
And even more important than these differences in connection 
with the administration of an income tax is the different rela- 
tion in which the taxing power stands towards corporate in- 
dustries. In the United Kingdom all corporations are crea- 
tures of Parliament and the method of stoppage at the source 
can be rigidly enforced. In the United States corporations are 
the creatures of the states, not of Congress, and compelling 
them to pay a federal income tax on all interest and dividends 
which they might disburse would be a task of considerable 
difficulty. When these and other differences are carefully 
weighed, together with the undoubted dislike of the people of 
the United States for methods of taxation to which the term 
" inquisitorial " may be justly applied, the case for a federal 
income tax is materially weakened. 

As to the third argument, that is, the need of offsetting in 
some way the unequal burden imposed on wage-earners by 
customs and excise taxes something will be said in the next 
section. At this point it will suffice merely to raise the question 
whether an industrial community which maintains generation 
after generation a system of taxation which adds largely to 
the expense of living will not accommodate itself to the situa- 
tion by advancing correspondingly its standards of living. If 
it does this wage-earners will command proportionally higher 
wages and the burden imposed upon them by the higher ex- 
pense of living will be more apparent than real. 

For these different reasons, it would, in the opinion 01 the 
writer, be unwise to ask the Supreme Court to pass af^ain upon 
the constitutionality of an income tax until the right of the 
federal government to control all large corporations and not 
merely the transportation companies engaged in interstate 
business has been clearly established. Only on condition that 
the method of stoppage at the source could be widely used and 
that the law was so drafted as to have the support of educated 
public opinion could a federal income tax be accurately and 
fairly assessed. Unless so assessed such a tax would merely 



Taxation and Distribution 577 

TCpeat on a national scale the injustices which liave brought 
discredit upon the personal property tax in every state in the 
Union. 

§ 329. The question of the effect of a system of taxation Place of 
upon the distribution of wealth is closely related to that of the ^^^^ Theory 
shifting and incidence of taxes. The difference may be illus- of Distxi- 
trated by reference to the case of customs and excise taxes re- 
ferred to in the last section. Such taxes are paid in the first 
instance by business men, importers and dealers, who look upon 
them as items in their expenses of production. By them they 
are usually shifted to purchasers and ultimately to consumers 
upon whom they finally fall. But if such taxes are a permanent 
feature of the industrial situation the higher expenses of living 
which they cause will in their turn call for higher standards of 
living, as regards money earnings, on the part of the wage- 
earning population. If these develop money wages will rise 
to a point which permits the enjoyment of the same real wages 
as were secured before the taxes were imposed. Shall we say, 
then, that such taxes are paid by wage-earners or that they 
are shifted to employers who must pay them higher wages? 
But, if we are to follow them to employers we must obviously 
continue our inquiry and determine whether the latter really 
bear them in the form of lower profits. The matter becomes 
so complex at this point that it seems better to say, as we have 
already done, that such taxes are normally paid by consumers, 
and to leave their effect upon the distribution of wealth for 
separate consideration. 

The relation between taxation and distribution is usually 
treated as though the two were separate and distinct processes. 
The laws of distribution are explained, as has been done in this 
treatise, with the conscious omission of taxes from the picture. 
Taxes are then brought in as a means by which incomes already 
distributed are laid under tribute so that the government may 
be maintained. Although a convenient, this is a somewhat 
misleading, account of the matter. The government asserts its 
claim not after all other claimants have been satisfied but as 
promptly and even more imperiousjy than any other recipients 
of income. The payment of taxes is thus a vital part of the 
distributive process, differing from the payment of profits, rent, 



578 



Taxation and Tax Reform 



Three 
Classes of 
Taxes Dis- 
tinguished 



Conclusions 
as to Land 
and Special 
Franchise 
Taxes 



wages, and interest, only in that the government's claim is 
based on superior force rather than on free contract guided by- 
economic motive. This does not mean that the government 
may not be properly described as a factor in production and 
therefore entitled to a share of the product. Undoubtedly its 
part in production is of the most vital importance. It merely 
means that as this part is not based on contract, there is no 
method of measuring economically the amount of its contri- 
bution. It performs the indispensable services of protecting 
life and property, preserving order, administering justice, etc., 
and takes in return what it pleases, or rather what the citizens 
in a democratic country please to permit it. 

§ 330. From the point of view of their influence on the dis- 
tribution of wealth the taxes that have been discussed in the 
preceding pages may be divided roughly into three different 
classes. To the first class belong land, and special franchise 
taxes. They fall upon what we have previously styled the 
" funded " income that is given off year by year by permanent 
and durable property, like land, as space to build upon, or by 
special and exclusive privileges, like franchises granting ex- 
clusive rights to lay tracks or string wires along the public 
streets. Normally such taxes have no effect on distribution 
except to divert to the use of the government a part of the 
income that would otherwise have gone to the owners of the 
property or franchises taxed. Such property and franchises 
are already being made to yield all of the income that they 
can afford under the given circumstances and the imposition 
of a tax in no wise alters these circumstances. Thus the en- 
tire tax is paid out of the funded income. 

Since the value of sources of funded incomes is the annual 
net income capitalised at the current rate of interest, a sec- 
ondary effect of such taxes is to reduce this value by the cap- 
italised value of the tax. If the tax is made so high as to 
take the entire funded income, the property or franchise which 
gives rise to it ceases to have any value as an investment. In 
practice, of course, taxes usually take only a portion of the 
funded income and merely reduce without destroying the value 
of the lands and franchises from which they come. From this 
relation between the rate of taxation and the value of the 



Customs and Excise Taxes 579 

property taxed two principles are deduced of considerable 
practical importance. First, new or higher taxes on land or 
special franchises unless the latter are appreciating to offset 
fully such taxes involve a forced reduction in the value of such 
property. Second, after such taxes have been imposed long 
enough to permit of the property having changed hands they 
become virtually burdenless so far as present owners are con- 
cerned. 

The second class of taxes include those on commodities Conclusions 
which are regularly produced and consumed and upon com- toms and 
petitive businesses. These are normally shifted from those Excise 
who pay them to those who consume the commodities or are 
served by the businesses taxed. Their effect on distribution is 
complex, but in general they may be said to figure among the 
conditions to which economic motives, such as standards of liv- 
ing and standards of saving, adjust themselves. A concrete 
illustration will help to make the effect of such taxes clearer. 
In the United States at the present time the greater part of the 
federal revenue is derived from taxes upon commodities which 
■enter into the consumption of the ordinary wage-earning 
family, that is, on sugar, tobacco, liquors, cotton and woollen 
goods, etc. Suppose that these taxes add — and this is a mod- 
erate assumption — five per cent to the expense of living in this 
country. This higher cost of living has now been experienced 
for many years. It is one of the factors with which immi- 
grants must reckon when they cross the ocean in pursuit of 
higher wages. Is it not probable that the higher cost of living 
has acted as a slight check upon the growth of population, 
partly by inducing a postponement of marriage and partly by 
discouraging immigration, so that it is one of the influences 
that account for the undoubted fact that the American stand- 
ard of living and scale of wages is higher than the European 
by more than enough to offset the higher cost of living in the 
United States? Or, to put the case negatively, if these taxes 
were all repealed and in their place a federal income tax were 
imposed exempting incomes under $i,ooo and at a rate suf- 
ficient to afford all needed revenue, is it probable that the wage- 
earning population of the United States would be permanently 
better off? Would not accelerated marriages and a larger 



580 Taxation and Tax Reform 

tide of immigration before long so add to the labour supply. 
that wages would be reduced by an amount corresponding to 
the lowered cost of living? Space will not permit an exhaust- 
ive discussion of these questions, but it should be clear that a 
higher cost of living, which is deliberately brought about and 
continued year after year through a country's taxing system, 
may be less of a hardship to wage-earners than is ordinarily 
supposed. From this brief discussion of this second class of 
taxes that is regularly shifted to consumers, two principles 
may be inferred. First, new taxes on commodities that are 
regularly produced and consumed or on competitive businesses 
impose a burden on the persons who consume such commod- 
ities or who are served by such businesses. Second, as time 
goes on there is a tendency toward readjustment which makes 
such taxes less and less objectionable the older they become. 

Conclusions -phe third class of taxes include those on inheritances and 
as to Inheri- , . , , , , 

tance, In- those on mcomes and general property when accurately as- 
come, and sessed. These taxes cannot be shifted and since they do not 
fjeneral 
Property fall upon one particular kind of property as distmct from other 

iaxes kinds neither can they be capitalised. Their effect upon dis- 

tribution is thus even slighter than that of taxes of class one, 
since they merely take from the incomes of different persons 
without altering their economic relations to others nor even 
reducing the value of their property for investment purposes. 
As was brought out in our discussion of these taxes, those on 
inheritances are least objectionable because least burdensome 
to those who must pay them. Those on income are admirable 
when they can be accurately and fairly assessed, but very un- 
fair if evasions are common. Finally those on general prop- 
erty fall in practice so far short of the ideal of taxing all 
property fairly and equally that they are not at all to be 
recommended. 
Difficulties § 33 1. The reform of the taxing system of any country is 
Tax Reform complicated by the fact brought out in the last section, that 
as regards at least two great classes of taxes, old taxes are very 
much less objectionable than new ones. Since reform means 
usually substituting something new for something old and 
established, this truth is well calculated to discourage reform- 
ing enthusiasm. If the following suggestions as to changes 



Reform of Federal Revenue System 581 

that would be desirable in the taxing system of the United 
States seem conservative it is partly because the writer is con- 
vinced of the tendency of taxes like wine to ripen and mel- 
low with age and partly that he is, perhaps unduly, impressed 
by the administrative difficulties in the way of some of the 
taxes currently advocated. 

The first fact that must be borne in mind by the would-be Tax Prof*- 

Igth Ll^ost 
reformer of taxing methods in the United States is the relation Acute fm- 

between the fiscal requirements and the taxing powers of the Cities 
different branches of the government. The federal govern- 
ment has limited functions to perform and almost unlimited 
taxing powers. For it the problem of securing adequate 
revenues is comparatively simple. The state governments in 
turn are in a position of ease, if not of affluence. The functions 
which they usually assume are few and inexpensive, while their 
taxing powers are but slightly abridged by the federal and 
state constitutions. The situation is very dififerent with the 
local governing bodies and especially the cities. Their needs, 
as already shown, call for twice as much revenue per capita 
as those of both s.tate and nation together ; and at the same time 
their taxing powers are rigidly limited to those expressly con- 
ferred by state legislation. For them the problem of making 
ends meet is always acute and the chief questions about any 
new tax are : will the courts sustain it and will it bring in 
revenue. 

§ 332. In the opinion of the writer the present federal p®^*^'"'^^, ^^ 
revenue system is fairly satisfactory, except at two points. For Revenue 
reasons that have already been explained he advocates the Sy.stem 
gradual substitution of a simple revenue tariff for the present 
cumbrous protective tariff. This change might be effected 
without any loss in revenue and after it was accomplished, as 
English experience abundantly proves, the revenue machinery 
would be much more readily responsive to changing fiscal 
needs than it is at present. The second point for development 
is in connection with the attempt to control adequately in the 
public interest corporations engaged in interstate business. It 
has been suggested that the imposition of a moderate federal 
license tax on such corporations would help to make them more 
alive to their obligations to the public and the plan seems to 



582 



Taxation and Tax Reform 



Inheritance 
Taxes 
should be 
Extended 



merit at least a trial. Such a tax should be rather a means 
of control than a source of revenue, however, because any 
considerable revenue that may be derived from these businesses 
is imperatively needed by the state and local governments. 

§ 333- Taxation depends so largely upon local conditions for 
its efficiency that suggestions in reference to desirable state and 
local taxes have little point imless it is clearly indicated what 
types of state or branches of local government are referred to. 
In what follows the writer has had in mind the conditions and 
needs of the more advanced industrial states and of the 
larger cities of the United States. Space precludes a dis- 
cussion of the tax problems of all the different states, and 
this is the less necessary because those that are most advanced 
are already in the situation towards which the others are 
moving. 

The most important reform that is needed in connection 
with state taxation is the abolition of the discredited general 
property tax as a source of state revenue. The part of this tax 
which applies to real estate should be remitted not because 
real estate is too heavily taxed but because all revenue from 
this source ought to be assigned to the local governments whose 
needs so far exceed their taxing powers. The reason for 
abolishing the other part of the tax, that applying to personal 
property, is even stronger. Experience has demonstrated con- 
clusively the impossibility of assessing such property fairly in 
complex industrial communities. Under these circumstances 
to continue the attempt to tax personal property is to bring 
the whole system of taxation into disrepute. In place of the 
general property tax three fruitful sources of revenue are open 
to the state governments — inheritance taxes, corporation taxes, 
and license taxes. 

The arguments in favour of taxing inheritances and the form 
which such taxation may properly take have already been dis- 
cussed at length. The Wisconsin law with its five distinct 
classes of heirs is perhaps more complicated than is desirable. 
It would probably suit American conditions better to dis- 
tinguish only two classes of heirs, those in the direct line and 
;collateral relatives and strangers, or, at most three, those in 
the direct line, near collateral relatives, and more remote rela- 



Corporation Taxes 583 

fives and strangers. For each class an inheritance of a cer- 
tain size should be exempt from taxation, but there is no reason 
for making the exemption as large as is often done ($10,000 
for widows in Wisconsin, for example) if the rate of 
taxation is progressive. The range of progression should de- 
pend in part on local sentiment but it is believed that no good 
reason can be urged against going at least as far as the Wis- 
consin law and making the highest rate applying to large 
inheritances passing to remote relatives or strangers fifteen per 
fcent. The writer would even advocate the higher maximum, 
twenty per cent, imposed in the United Kingdom and in France. 
The successful experience of New York with its moderate in- 
heritance tax indicates that large revenues may be derived 
from this source without imposing an]/ excessive burden upon 
tax-payers. 

§ 334. Of the various plans that have been tried for taxing The Best 
corporations the three that promise greatest success in the Corporatioa 
United States are by means of : (i) gross receipts taxes ; (2) Taxes 
capital stock and bonded debt or ordinary franchise taxes ; and 
(3) special franchise taxes. Gross receipts taxes are not gen- 
erally to be commended, but in connection with one form of 
business, that of insurance, they offer the easiest, surest, and 
perhaps fairest method of taxation yet devised. For corpora- 
tions generally the fairest basis of taxation is believed, for 
reasons already sufficiently explained, to be the aggregate value 
of the outstanding shares of stock and the bonds. Together 
these reflect pretty accurately the normal earnings of cor- ' • 

porations which constitute the best available test of tax-paying 
ability. Until the states undertake to control the book-keeping 
of corporations so that the earnings themselves can be accu- 
rately assessed the stock-and-bond index of earnings is un- 
doubtedly the most reliable substitute. Even a moderate tax 
applying to all of the corporations doing business within a 
state in proportion to the amount of that business is capable, 
as the experience of several of the states demonstrates, of bring- 
ing in large revenues. The special franchise tax is advocated 
as a supplement to the ordinary franchise tax for corporations 
which enjoy special and exclusive privileges. Reasons have 
already been given for favouring the Nev/ York pla»i by whick 



584 



Taxation and Tax Reform 



Tliie High 
Ldcense 
System 
should be 
Extended 



The Real 
:[';state Tax 
should be 
Separated 
into Land 
and Build- 
ing Taxes 



special franchises are assessed as real estate and the greater 
part of the proceeds of the tax upon them is enjoyed by the 
local governing bodies. 

§ 335- Up to the present time the high hcense system has 
been apphed only to the Hquor business. The moral advan- 
tages of confining the selling of liquor to fewer establishments 
in more responsible hands has been the chief argument urged in 
its favour. Experience with it in operation has made prom- 
inent certain economic advantages which suggest the desir- 
ability of applying it to many other branches of trade. The sell- 
ing and distribution of milk, ice, groceries, provisions, etc., 
admit of even larger savings through the concentration of man- 
agement brought about by the high license system than the sell- 
ing and distribution of liquors. These businesses offer a large 
and practically untouched field for the tax gatherer and just as 
the paym.ent of high licenses has served neither to make the 
saloon business unprofitable nor to compel the consumer to 
pay much more for his beer and whisky so it is believed that 
the payment of high license by milk dealers, ice companies, 
grocers, butchers, etc., would serve merely to concentrate these 
businesses into fewer and more competent hands without 
appreciably raising the prices of the commodities sold. By 
extending its license system to include these and other busi- 
nesses every state in which large cities are found could put 
itself in a position to dispense with the returns from the general 
property tax. 

§ 336. The local governing bodies must doubtless continue 
as at present to derive the greater part of their revenue from 
the taxation of real estate. In so doing however they ought 
to differentiate the land or ground tax from the building tax 
and allow these taxes to go different ways. With the abolition 
of the tax on personal property the general property tax loses 
its justification and what is left of it must be defended upon in- 
dependent grounds. A moderate building tax may be defended 
because it selects a reasonable criterion of tax paying ability, 
that is, the sort of house or place of business a person occupies, 
and bases its exaction upon that ; but it should not be confused 
with the land tax. The latter, if of old standing, finds sufficient 
justification in the fact that those who pay it no longer feel it 



Extension of the Land Tax 585 

as a burden and to relax it would be making them a present 
of something they never expected to receive. But this justi- 
fication of an old land tax becomes in' turn a ground of con- 
demnation for a new or higher land tax — the rent of land not 
having changed. Such a tax involves the confiscation of 
property. 

This does not mean, however, that a city or country must Extension 
icontent itself with an unvarying land or ground tax year after Tax^" 
year. In progressive communities there is a tendency for the 
rent and value of land gradually to increase and this irrespec- 
tive of any action or merit on the part of the landowners. A 
part of this increase may properly be claimed by the local 
government on the ground that it has been due to the general 
progress of the place and that what is left will more than com- 
pensate the owner for any trouble he may have had in con- 
nection with it. How this enforced sharing with the com- 
munity of the benefits of progress is to be imposed upon land- 
owners is a difficult question, but several ways have been sug- 
gested and if the economic grounds for the plan are conceded 
there seems no good reason why the needed administrative 
machinery may not be created. 

In addition to buildings and land, the special franchises or Special 

1 • r x,i- ' jL- Franchises 

monopoly earnmgs of public service corporations are a proper ^^ ^ Source 

object of local taxation and the plan adopted by New York of Revenne 
State of defining such special franchises as real estate for pur- 
poses of taxation has already been advocated. No locality is 
warranted, however, in expecting to derive more than moderate 
returns from the taxation of special franchises. That such 
franchises have value at all indicates that the corporations en- 
joy'mg them are taking advantage of their monopoly position 
to charge more for the indispensable services that they render 
than these services cost. It is the duty of the government. 
instead of permitting the value of special franchises to increase, 
to insist on lower charges even at the sacrifice of revenue to 
itself. Cheap water, cheap gas and electricity, and cheap 
transportation facilities are so important that they compare 
with the services which the municipality itself renders. It 
would be robbing Peter only partly to pay Paul to allow the 
value of special franchises to appreciate for tlie sake of the 



586 



Taxation and Tax Reform 



License 



Conclusions 
as to 

Municipal 
Taxation 



Changes 
Advocated 
Con- 
servative 



General 
Conclusion 



small proportion of the increased monopoly income that is 
diverted by taxation to the general use. Even if the govern- 
ment received all of the increase in earnings it would still be 
doubtful policy to permit needlessly high charges to continue 
in force. 

A fourth source of municipal revenue is from license taxes 
justified on grounds explained in the last section. Already it 
is customary in several states to share the proceeds of liquor 
license taxes with the local governments within whose juris- 
dictions the licenses are held. There is every reason why 
this policy should be made general if the high license system 
were extended as has been advocated. It would then prove 
an important municipal as well as state resource. 

These four taxes supplemented by the other sources of local 
revenues described in the last chapter would, it is believed, fully 
meet the legitimate requirements of local governments in the 
United States. 

§ 337. In comparison with the taxes now in force in the 
United States the system of taxation which v/ould result if 
the various changes that have been suggested were adopted 
would have at least the advantage of simplicity. No tax has 
been approved that could not be easily and accurately assessed 
and collected. Nearly as important as this administrative merit 
is the fact that such large use is proposed of what we have 
called " burdenless " taxes. \^^en the business community 
was thoroughly adjusted to the system it is believed that not 
only the land and special franchise taxes but also the inheritance 
and license taxes would impose but little real burden upon those 
who paid them. As one final merit it may be claimed that in 
assigning an important role to license taxes the system would 
serve to foster economical production rather than to stifle 
enterprise as business taxes are only too apt to do. 

The proposed changes will seem altogether inadequate to 
advocates of the single tax or other radical plans of tax reform. 
To such persons no system which fully respects vested interests 
can be satisfactory for it is some of those very interests that 
it is desired to reform out of existence. " Single taxers," for 
example, persuaded that the private enjoyment of the income 
called land-rent is unjust, propose to secure this income for 



General Conclusion 5^7 

the government by means of a tax. But by so doing they 
would practically confiscate the property of landowners, since 
the principal incentive to the private ownership of land is en- 
joyment of the income which land affords. In the same vvay 
some socialists have proposed to realise their more radical 
programme of substituting public for private ownership of all 
of the instruments of production, by taxing land and capital so 
heavily that private ownership will cease to confer any benefits 
mpon the property owner. Much as the author both wishes 
and hopes to see a more equal distribution of property than 
now prevails, he cannot persuade himself that good can result 
from using the machinery of taxation to confiscate property 
which the law has so long protected. As time goes on it will 
doubtless be desirable gradually to extend the domain of public 
property and in so doing to encroach upon the field of private 
ownership. This may be accomplished either by an exercise of 
the right of eminent domain under which property required for 
a public purpose may be condemned, full compensation being 
paid to the previous owner for the loss which he suffers, or by 
asserting the right of the State to the exclusive use of certain 
forms of property or to the exclusive pursuit of certain indus- 
tries. To attempt to accomplish it, however, by seizing with- 
out compensation one after another of the forms of property 
that it is desired to withdraw from private ownership, even if 
this be done under the guise of taxation, is to substitute spolia- 
tion and robbery for law and justice. The mistakes of the past 
in permitting the undue extension of the field of private 
property cannot be corrected by injustice in the present. What 
is rather to be insisted upon is that the lessons of the past shall 
be taken to heart by those charged with the administration of 
public affairs so that similar mistakes shall not be repeated. 

REFERENCES FOR COLLATERAL READING 

In addition to the general works referred to at the end of the last 
chapter the following special treatises on different phases of taxa- 
tion in the United States may be consulted with profit: *Jiidson, 
Treatise on the Power of Taxation, State and Federal; * Patten, A 
Rational System of Taxation ; *Howe, Taxation in the United States 
tinder the Internal Revenue System; Walker, Double Taxation in 
the United States; Ely, Taxation in American States and Cities; 



588 



Taxation and Tax Reform 



Durand, State Finance Statistics, 1890 and 1895 (in New York State 
Library Bulletins for 1897); Worthington, Historical Sketch of the 
Finances of Pennsylvania; * Eastman, Taxation for State Purposes 
in Pennsylvania; Robinson, A History of Taxation in New Hamp- 
shire; Judson, Taxation in Missouri; Le Rossignol, Taxation in 
Colorado; Kinsman, The Income Tax in the Commonwealths of the 
United States; Plehn, The General Property Tax in California; 
Carver, The Ohio Tax Inquisitor Law; West, The Inheritance Tax; 
Rosewater, Special Assessments; Whiiten, Taxation of Corporations 
in New York, Massachusetts, Pennsylvania, and New Jersey (in New 
York State Library Bulletins for igoi); *Durand, Finances of New 
York City; ^Hollander, Financial History of Baltimore; Huebtier 
and Millis, The Inheritance Tax in the American Commonwealths 
(articles in Quarterly Journal of Economics for August, 1904, and 
February, 1905); Urdahl, The Fee System in the United States; 
Chapma7i, State Tax Commissions in the United States; * Bullock, 
Direct Taxes and the Federal Constitution (articles in Yale Reviev/ 
for February, May, and Avigust, 1901); *///'//, The English Income 
Tax. 



CHAPTER XXIX 

ECONOMIC PROGRESS 

§ 338. Economic progress is improvement in general well- The 
being due either to increased command over economic goods Economic 
or to reduced costs of production. It may show itself in in- Progress 
creased earnings for the labouring masses, in shortened hours 
of labour, or in an increased adaptation of work to the tastes 
and capacities of workmen. Definite as these criteria of prog- 
ress appear to be, it is unfortunately true that there are no 
means of comparing them accurately from generation to gen- 
eration. Until recently few records were kept of the com- 
modities which families in different circumstances were in the 
habit of consuming. Even those which are now preserved 
will be puzzling in many of their details to future economists 
because the goods consumed will have changed in kind and 
quality as well as in quantity. The impossibility of making 
exact allowance for such changes opposes a permanent bar- 
rier to accurate comparisons between the standards of living 
of different periods. Similar difficulties are encountered in 
trying to gauge changes in the sacrifices involved in produc- 
tion. If it can be shown that the length of the working day 
has been shortened, it may yet be claimed by the unbelieving 
that the intensity of labour has increased correspondingly, and 
there is no certain way of deciding whether or not this has 
been the case. Under these circumstances the economist must 
content himself with comparing those objective indications of 
well-being, such as the rates of wages earned by workmen of 
different grades, the length of the working day, etc., which 
admit of measurement and appeal to the judgment of intelli- 
gent observers to determine whether these and other changes 
have really added to human welfare. 

Even so simple a question as that whether average money 
wages have increased or diminished can be answered only on 

•5S9 



59^ Economic Progress 

Chaiiges the basis of elaborate statistical investigations. One of the 
and Hours latest of such inquiries, conducted by the English statistician, 
«f Labour Mr. Bowley, led to the conclusion that in the United Kingdom 
if the average wages paid in different employments from 1890 
to 1899 be represented as 100, the average wages paid at pre- 
vious periods should be represented as 90 from 1880 to 1890, 
95 from 1870 to 1880, 75 from i860 to 1870, 65 from 1850 to 
i860, 60 from 1830 to 1850, 65 from 1820 to 1830, 65 to yo 
from 1810 to 1820, and 55 to 65 from 1800 to 18 10. This re- 
sult, although confirmed as regards some of its items by in- 
vestigations made by Sir Robert Giffen, Mr. Leone Levi, and 
other English statisticians, must be accepted as subject to a 
large and indeterminate margin of error. Perhaps all that 
should be affirmed on the basis of it is that the trend of 
wages during the century was distinctly upwards and that the 
rise for the whole period was not less than 50 per cent. As 
regards hours of labour there is equally clear evidence of im- 
provement. Hours generally appear to have been shortened 
about two a day {e. g., from 10 to 14 in different employments 
to from 8 to 12). Statistical evidence in reference to changes 
in wages and hours of employment in the United States is less 
ample than for the United Kingdom. Without entering into 
details it may be affirmed that in this country also the trend 
appears to have been upwards as regards wages and down- 
wards as regards hours during the last century, but that the 
improvement was less marked than in the United Kingdom, 
partly, doubtless, because the United States started at a 
higher level and one of the tendencies of the century was to 
v»^ards equalising conditions in the two countries. 
Progress § 339. Another method of gauging the extent and direc- 

sumption tion of economic progress is to review the changes that have 
occurred in the fields of consumption, production, and distribu- 
tion to determine whether they have been, on the whole, 
favourable. In Chapter IV. we considered the contributions 
which changes in wants and habits of consumption may make 
to general well-being. Progress in this field depends upon 
increasing attention to the laws of variety, of harmony, and of 
least social cost, upon greater economy in consumption, and 
tipon the substitution for narrow and selfish luxury of more 



gress m consumption by^ 

social uses of wealth. As regards each one of these aspects 
of consumption progress may be discerned. 

Improvements in transportation facilities have helped to Increased 
break down local habits and prejudices in consumption, while ^"^ ^ 
at the same time they have served to bring an ever greater 
variety of products to local markets. As a consequence the 
wage-earner of to-day may enjoy as great a variety of goods 
as did people of wealth a century ago. That this increased 
variety of consumption has added to general well-being can 
scarcely be questioned. 

Progress in the direction of greater harmony in consump- Increased 
tion is less clearly in evidence, partly because the increasing "^i^™o^y 
variety of goods open to consumers has itself tended to cause 
confusion,, Within recent years, however, a great deal of at- 
tention has been given to the cultivation of taste among the 
masses and there is reason to think that these efforts are be- 
ginning to bear fruit. In this department there is still, never- 
theless, room for great improvement. If appreciation of 
beauty of form and colour could be made general, the produc- 
tion of beautiful objects for ordinary domestic use might in the 
future be effected as cheaply as is that of ugly objects now. 
The result would be a material addition to the sense of well- 
being and contentment of all classes. 

Another result of higher standards of taste on the part of Reduced 
consumers would be increased scope for congenial employ- 
ments for producers. Thus the law of least social cost would 
come into play, to add to the advantages resulting from the 
change. Perhaps the clearest indication that progress to- 
wards lessening the costs of production is being made in the 
United States is the gradual abatement of the quite irrational 
passion for wealth accumulation that has been noted by foreign 
observers as an American characteristic, and a more general 
appreciation of the fact that what a man does for his living 
has at least as great an influence on his happiness as the 
amount he earns. 

The indications of progress towards greater economy in increased 
consumption are unmistakable. Science has begun to con- <^o"o"^y 
cem itself seriously with the problem of determining what 
kinds of goods contribute most largely, in proportion to their 



592 



Economic Progress 



Consumers' 
Leagues 



Progress 

in 

Production 



cost, to the satisfaction of man's physical wants, and the results 
already achieved are noteworthy. At the same time success- 
ful efforts have been made to reduce the losses due to fire and 
flood and to repress those forms of consumption that are 
socially injurious rather than beneficial. Even clearer has 
been the progress made towards substituting social for merely 
selfish ways of using wealth. The rich are undoubtedly grow- 
ing richer with the progress of time, but they are also becoming 
more mindful of their social obligations. Public opinion no 
longer finds an excuse for wanton extravagance in the " make- 
work " argument and is increasingly appreciative of rich men 
who live simple and unostentatious lives in order that they 
may have the more to spend for public purposes. No exact 
statistics showing the increase in the United States of gifts 
for charitable and educational objects are available, but there is 
good reason to believe that they have grown at a much more 
rapid rate than private fortunes. 

Another indication of progress in the field of consumption 
in the United States is the organisation of Consumers' Leagues 
in the large cities of the country. By means of white lists, 
Consumers' League labels, and other devices, these societies 
enable their members and other interested persons to discrim- 
inate in their purchases between the products of fair and 
humane employers and those of their less scrupulous competi- 
tors. The existence of these societies is itself a hopeful sign, 
since it evinces a growing consciousness on the part of con- 
sumers of their responsibility for the conditions of produc- 
tion. By directing consumption along socially defensible lines, 
they have contributed their share towards the progress in con- 
sumption that has undoubtedly been achieved. 

§ 340. The advance that has been made in the field of pro- 
duction is so familiar as to require only the briefest considera- 
tion. Invention and discovery have scored triumph after tri- 
umph since the first application of steam power to industry, 
and in every branch of business the productiveness of labour 
has been largely increased. Other causes contributing to 
this result have been the opening up to exploitation of new 
lands and new sources of mineral wealth, the growth of capi- 
tal, improvements in forms of industrial organisation, and 



Progress in Distribution 593 

the development of more capable and intelligent men and 
women. 

When the enormous multiplication of goods that has been 
made possible by these changes is considered, it may well seem 
surprising that the condition of wage-earners has not been 
improved even more than has been the case. To account for 
this fact we must consider the progress that has been made in 
the field of distribution, 

§ 341. Progress in distribution results from changes which Progress 
increase the command over goods enjoyed by the masses. To tribution 
measure it the earning power of the bare-handed, unskilled 
workman of one period must be compared with that of the 
same workman of another, allowance being made for any 
change in the proportion which unskilled workmen bear to the 
whole population. The statistics already cited indicate that 
wages have risen substantially, and yet the margin between the 
necessary expenses of the ordinary labouring family and its 
earnings is still painfully narrow, even in the United States, 
the country of high wages. 

The reasons why the average workman still receives such a Reasons 
small return have already been suggested. In the first place, Persistence 
notwithstanding the substantial increase in the productiveness of Low 
of industry, an equal per capita distribution would still fail to ^^ 
provide very amply for the satisfaction of each person's 
wants. The number of persons of property and high-earning 
•capacity is still small in comparison with the number of the 
wage-earning population, and the surplus incomes of the for- 
mer, equally distributed, would not add very greatly to the 
present earnings of the latter. A second point is that the 
increased productiveness of industry has been due in large 
measure to improvements in the capital goods which assist 
production. The immediate tendency of such improvements 
is to add to the earning power of capital, rather than to that 
of labour. This has been neutralised by a remarkable growth 
in the amount of capital, and the rate of interest must have 
fallen to a very low level had not population also increased at a 
remarkable rate. The net result of these changes has been a 
lower rate of interest on an immensely larger capital fund and 
a somewhat higher rate of wages for a greatly increased 



594 



Economic Progress 



Inflttence 
of the 
Growth of 
Population 



labouring population. A third point concerns the trend of 
rent. The opening of new lands to exploitation must have 
raised materially the margin of cultivation and thus reduced 
the rent fund, had it not been paralleled by the remarkable 
growth in population just referred to. The older countries of 
Europe have poured out millions upon millions of colonists 
to the new lands, but without, except in the single case of Ire- 
land, reducing their own populations in the process. In conse- 
quence, the raising of the margin of cultivation in European 
countries has been slight, while the rapid settlement of new 
countries has caused the better lands and natural resources 
there to command high rents. Thus the rent fund, like the 
interest fund, has increased enormously in the aggregate, not- 
withstanding the fact that the margin from which rents are cal- 
culated has risen somewhat. A fourth and last pomt concerns 
the deductions from the social income made because of the 
monopoly powers of certain entrepreneurs. There can be no 
question that a considerable share of the new wealth due to 
economic progress is enjoyed by those controlling the various 
forms of monopoly analysed in earlier chapters. If these mo- 
nopoly incomes could be diffused either by more general com- 
petition or by the legal regulation of prices, the earnings of 
workmen might be higher. 

A superficial consideration of the above tendencies might 
lead to the conclusion that the growth of population was the 
chief cause of the persistence of the low earning power of 
workmen. Undoubtedly, had population increased less while 
capital increased at the same rate and new lands and natural 
resources were opened on the same scale, the economic position 
of the average man would have been much improved, but 
we are not justified in assuming any such possibility. As 
a matter of fact, the high rate of interest, which has been 
a chief influence in encouraging and making possible the 
remarkable increase in capital, has itself been mamtained 
in the face of such increase, at least in part, because of 
the parallel growth of population. The growth of popula- 
tion has been, also, a principal incentive to the discovery 
and exploitation of new lands and natural resources. It has 
thus stood in a causal relation both to the increase of capital 



Justification of Profits 595 

and the settlement of new countries, and speculation as to 
whether a less rapid multiplication would have been on the 
whole advantageous to the average man, is idle. 

Quite a different question is that as to whether such large 
deductions from the products of industry for the payment of 
competitive and monopoly profits, of rent, and of interest are 
necessary. It is at this point that radical reformers take issue 
with conservative economists. In the last chapter we consid- 
ered plans for securing for the common benefit rent and inter- 
est, and decided that they were impracticable. We must now 
examine these shares in a more positive way, to determine in 
what relation their payment stands to the motives and forces 
that cause economic progress. 

§ 342. Generally speaking, competitive profits are fairly Economic 
earned by those who receive them. They are the incentive tion^of^^ 
which industrial society offers to entrepreneurs who will im- Competi- 
prove upon current methods of production. To secure them 
entrepreneurs compete actively to lower their expenses of 
production so that they may undersell each other, and the 
whole community is benefited by the resulting reductions in 
the costs of production. At times, however, competitive 
profits are obtained in ways that injure rather than benefit 
society. Unscrupulous employers may take advantage of the 
ignorance or necessities of their workmen to depress their 
wages below the level which permits them to maintain their 
industrial efficiency. Cheap commodities obtained by this 
means are all too dear if the best interests of producers and 
consumers alike be considered. Other entrepreneurs may 
undersell their competitors by adulterating their products. 
Still others may sell their goods for less than their production 
has actually cost, and by declaring themselves insolvent shift 
the resulting loss to their creditors. These and other forms of 
competition give rise to competitive profits for which industrial 
society receives no adequate return, and no effort should be 
spared to render them impossible. 

Even more important as sources of large incomes to par- Monot>o]y 
ticular entrepreneurs are monopoly profits. These, too, are Profits 
usually secured, at least at the outset, in consequence of im- 
provements that have been made in the methods of production, 



59^ Economic Progress 

but they must always be viewed with some suspicion, because 
they are hkely to continue long after the improvements have 
been made and adequately paid for. If the monopolies which 
give rise to them are natural, that is, if they result from the 
fact that concentrated management and operation are econom- 
ical, sufficient monopoly profit to induce entrepreneurs to 
organise such industries on a large scale mxust be left to them 
if the benefits of monopoly are to be enjoyed. The govern- 
ment may properly interfere, however, in ways that have been 
discussed in earlier chapters, to prevent excessive monopoly 
profits. If the monopolies are the result of legal privileges, 
control over their profits should be exercised as a matter of 
course by the government w^hich grants such privileges. If 
they are due to obstacles to the free play of competition, or to 
unfair forms of competition, the duty of the state to remove 
such obstacles and put a stop to such unfair practices is clear. 
Unless the government is zealous in the exercise of its control 
over monopolies, great inequalities in income are sure to result 
without any commensurate benefit to the whole community. 
Rent and § 342. The payment of rent and interest for the use of pieces 

of land and capital goods is a natural consequence of the insti- 
tution of private property in the factors of production. That 
this institution has played an important part in stimulating 
economic progress in the past can hardly be questioned. It 
has served as a constant incentive to the industry and thrift 
without which no advance could have been made. The prin- 
cipal economic motive of the average man is to provide for the 
comfort and happiness of his family. To accomplish this 
object he is willing to work laboriously and to set aside a part 
of his surplus income as a provision for the time when he can 
work no more, or as a means to giving his children a better 
start in life than he has himself enjoyed. But a necessary 
condition to the accumulation of v/ealth for future use is that 
the law shall protect individuals in the ownership and control 
over their property. Where such protection is lacking little 
wealth will be accumulated, and of that little a large part will 
necessarily be expended in safeguarding what is left. On the 
other hand, the more certain the legal protection afforded to 
property-owners the larger will their accumulations become 



Interest 



Justification of Rent and Interest 597 

and the more ample will be society's resulting equipment in 
capital goods. 

The payment of rent and interest has been explained as a Justifi- 
transfer to property-owners of the shares of wealth which have ReoT 
been produced through the use of their property. It cannot 
be looked upon as a hardship to workmen, since it involves no 
reduction in the share of wealth economically ascribable to 
their labour. But it has been objected that the payment of rent 
to private landowners is unfair and uneconomical because the 
qualities in the land for which it is paid are either natural 
or due to social changes for which landowners deserve no 
credit. The reply to this contention is that while rent does 
frequently, if not usually, arise from these causes, it is still 
true that private property in land is the surest means of 
encouraging the best use of land. To the extent that rents may 
be diverted to the service of the whole community, without 
injustice to present landowners and without interference with 
the best uses of land, such diversion should be effected by means 
of taxes. But this as has already been pointed out offers onlv a 
limited field for reform.* 

The payment of interest is the incentive which industrial Justifica- 
society offers to those who will save and invest their incomes, /ntei° st 
just as wages are the premiums offered to those who will 
work. So long as men continue to be dominated by the mo- 
tives which now control them, the one is as defensible, econom- 
ically, as the other. It is not such payment, as has already 
been pointed out, that is ground for dissatisfaction with the 
institution of private property, so much as the unequal distribo- 
tion of wealth that accompanies it. 

^^§344. An unequal distribution of wealth must result from Unequal 
the institution of private property so long as individuals and tio^^of 
families differ greatly in earning capacity and in prudence and Wealth 
forethought. Where these conditions prevail some individ- fromln- 
uals and families enjoy large incomes, and out of these incomes equalities 
set aside for investment large savings, while others accumulate i^^v^uals 
little or nothing. In some families wealth and the quali- 
ties necessary to its preservation become hereditary, and 
great fortunes are passed on from parents to children 
through several generations. More frequently the wealth 
* Cf. Sections 306, 307, 308, and 336. 



59^ Economic Progress 

accumulated in one generation is gradually dissipated either 
through division among numerous heirs or because those 
who inherit it lack either the capacity or the inclination to 
keep it unimpaired. So long as a fair degree of equality of 
economic opportunity is preserved the influences which make 
for the disintegration of large accumulations of wealth are 
likely to predominate, and the very rich men of each generation 
are likely to be those who have acquired the greater part of 
their fortunes during their own lifetimes. This has been the 
case in the United States up to the present time, and there is 
nothing in the practice of paying interest and rent for the use 
of property fairly acquired that threatens to make it less the 
case in the future. ~ ■ : 

Although hereditary fortunes are usually dissipated after a 
few generations, it is still true that much of the wealth in exist- 
ence at any one time has been inherited by those who own and 
enjoy it. The possession of such wealth cannot, for obvious 
reasons, be justified on the ground of any special merit on the 
part of its owners, and it is for this reason that inheritance 
taxes are so generally approved by thoughtful persons. In 
resorting to this form of taxation, it must not be forgotten, 
however, that the prospect of bequeathing property to one's 
children or other heirs is one of the principal motives to saving 
and accumulation. Moderate inheritance taxes probably in- 
fluence but little the rate at which the fund of capital is 
increased, but no very drastic use of this form of taxation 
could be made without weakening one of the incentives to in- 
dustry and thrift and in this way injuring the whole com- 
munity more than it would be benefited by a more equal distri- 
bution of wealth, 
ress in § 245. The review of the circumstances which have contrib- 
uted to the economic progress of the past that has been given 
indicates the conditions upon which the economic progress of 
the future must depend. Changes in wants and in habits of 
consumption calculated to increase the satisfaction which men 
derive from goods, and to lessen the cost involved in their pro- 
duction, must continue to be made; methods of production 
must be further perfected by improvements in the capital 
goods used, by a fuller utilisation of the forces of nature, by 



•"uture 



The Regulation of Monopolies 599 

an increase in the fund of capital, by a better organisation of 
industry, and by a steady improvement in the efficiency of the 
working population; the distribution of the social income 
must be modified so that the command over economic goods 
enjoyed by the rank and file in the industrial army will be 
ever larger. 

Some of the reforms that will assist towards these ends may The 
profitably be recalled. Isolated workmen often fail to secure the ^f Labour 
earnings to which they are economically entitled because they Unions 
do not bargain on terms of equality with their employers. 
Trade unions are the agencies that must be relied upon to cor- 
rect these inequalities. So long as they do not try to become 
close monopolistic associations, but confine their activities to 
securing the best terms possible for their freely admitted mem- 
bers, they merit all the encouragement and assistance that can 
be given them. Notwithstanding numerous exceptions, their 
general tendency is towards improving the condition of wage- 
earners and rendering more harmonious and cordial the rela- 
tions between the latter and employers. 

For wage-earners among whom trade unions can be organ- Of Labour 
ised, state interference to prevent the making of socially disad- ^^^ 
vantageous labour contracts may not be necessary. In the case 
of great industrial classes, however, nothing but an aggressive 
policy of interference to establish the plane of competition can 
serve to protect workmen from unduly long hours under in- 
sanitary conditions. The codes of labour law alread}^ adopted 
must be extended and perfected, and in time may have to em- 
brace even prescriptions in regard to the minimum rates of 
pay that will be tolerated in certain employments. Side by 
side with this policy of regulation must be developed agencies 
for caring adequately for the unemployable and for protecting 
from their deadly competition the individuals and families that 
are capable, under proper conditions, of independent self- 
support. 

In certain industries free competition has proved itself in- The 
capable of regulating economic relations as the general inter- ^^ ^ 
est requires. Some industries are monopolies by their very Monopolies 
nature, others have become monopolies because of defects in 
the legal system. In relation to such industries the function 



6oo 



Economic Progress 



of the state is clear. Natural monopolies should be controlled 
as regards the charges they are allowed to make for the serv- 
ices they render, and sometimes as regards also the quality of 
these services. When this control can only be exercised effect- 
ively through the expedient of government ownership and 
operation, the latter should be fearlessly undertaken. Only by 
such means can the interests of the public be safeguarded and 
injustice prevented. Monopolies that have arisen because of 
defective laws or public policies should be attacked through 
such laws. It is the duty of the state, so long as it contmues 
to permit free competition, to enforce fair competition, and 
appropriate measures to this end must be devised and put into 
execution. 

The same reasons that make factory regulations necessary 
to the health and safety of factory employees make necessary 
the effective regulation of housing conditions in great cities. 
The ignorant and careless who submit to insanitary work- 
rooms will submit as readily to insanitary homes unless the 
state or city interferes to enforce minimum standards of 
cleanliness and decency. 

Even more important than increased attention to public 
health is increased attention to public education. For reasons 
that have been given, parents cannot be depended upon to 
demand as high standards of education for their children as it 
is to the general interest that children should enjoy. The state 
must interfere to provide adequate schools and to compel at- 
tendance at such schools, or others of similar grade, and its 
expenditures for this purpose, so long as they are calculated 
to improve the educational advantages offered, can hardly err 
on the side of excess. 

In the chapters treating of the tariff and of tax reform 
(XX. and XXVIII.) reasons have been given for the belief 
that the protective tariff of the United States has outlived its 
usefulness and changes which it was thought would make the 
taxing system of the country both fairer and easier to admin- 
ister have been suggested. Reform in the methods of taxation 
is the more important because the economic progress of the 
future is certain to involve a large increase in public expendi- 
tures. Public revenues must be drawn from the incomes of 



Progress Depends on the Individual 6oi 

those who can best afford to contribute to the common fund, if 
the benefits of such increase are not to be offset by the curtailed 
incomes of those whose earnings ar€ already all too small. 

The above are some of the minor reforms which the author Progress 
would urge as substitutes for the radical changes proposed by ^®P^°^s 
advocates of land nationalisation and socialism. They belong Individual 
distinctly to the present and the immediate future, while the 
latter must be deferred to a future so remote that present 
discussion of them is of doubtful value. If economic prog- 
ress is to follow from these changes, they must result in 
steady improvement in the standards of living and of 
efficiency of the wage-earners in each community. For, at 
last analysis, every effort to improve conditions which is not 
registered in the character and capacity of the average indi- 
vidual must prove futile. Unless he responds to the enlarged 
opportunities that are presented to him, there is no hope of 
permanent betterment. That he will respond, and that rising 
standards of living will exercise the needed control over the 
growth of population, so that improvement in the quality of 
life will be as conspicuous a characteristic of the future as 
an increase in wealth and in numbers has been of the recent 
past, are beliefs shared by the majority of economists. 

§ 346. The trend of wage and interest rates and of rent in Probable 
future years cannot safely be predicted from their trend in the ^"^^® °^ 
past. All that can be said is that if present tendencies con- Interest, 
tinue to operate, certain results will follow. If the progress f^ ^he^^^^ 
in production that may be confidently predicted continues to Future 
be accompanied by a gradual rise in the standards of living of 
the working classes, there must be a steady increase in wages. 
One effect of such an increase will be a larger and larger accu- 
mulation of capital on the part of wage-earners themselves, and 
this, added to the capital accumulated by other classes, will 
have a tendency to reduce the rate of interest. There is little 
reason, however, for expecting anything more than a very 
gradual fall in interest, or that the rate will be lowered to noth- 
ing within many decades or even centuries. Opposed to such 
a result are the discoveries of ever new uses for capital goods 
that are certain to be made, and the lessened rate of accu- 
mulation on the part of capitalists that may be expected as their 



6o2 



Economic Progress 



incomes from capital, in consequence of the decline in interest 
itself, become smaller and smaller. The future course of rent 
will depend upon the relation between the growth of popula- 
tion and the progress that is made in utilising to better advan- 
tage the world's natural resources. The aggregate rent fund 
is certain to increase as it has in the past, as the area of the 
earth's surface turned to economic account increases. This 
may not, however, involve any lowering in the margin of cul- 
tivation any more than has the progress of the last one hun- 
dred years. 

To predict whether the above changes, which may be said 
to be in progress at the present time, will continue uninterrupt- 
edly is no part of the task of science. As in the past, so in the 
future, new conditions and new forces are likely to present 
themselves, which will cause the anticipations of present-day 
economists to seem as baseless as many of those of Adam 
Smith and his immediate followers have already been proved 
to have been. 

§ 347. The impression almost necessarily left upon the mind 
by a treatise on economics is of a somewhat hard and material 
view of life. In concentrating attention upon goods and the 
satisfactions which result from them, the economist seems to 
ignore love, religion, and other things that are truly great and 
admirable in the world. Excuses that may be urged in his 
behalf readily suggest themselves. He may not justly be 
accused of ignoring love and religion because he has little to 
say of them. Like other specialists, he must confine himself 
rigidly to his particular subject if he is to contribute anything 
of value to the sum of human knowledge. But the charge is 
not so easily answered. Economists profess to concern them- 
selves with the conditions upon which human well-being de- 
pends. They talk of satisfactions, of pleasures and pains, of 
progress. Can they have anything final to say on these sub- 
jects when they pass over the very experiences which, in the 
opinion of so many persons, make life most worth living? It 
must freely be confessed that they cannot. Basing their con- 
clusions on a study of the economic side of life, they can claim 
finality for them only as respects economic relations. The sat- 
isfactions they discuss are satisfactions connected with goods. 



True Goal of Economic Progress 603 

or the activities necessary to the production of goods. Whether 
an increase in these satisfactions really contributes to the moral 
elevation of the race is a problem that can be decided only by 
reference to broader considerations than fall properly within 
the field of economics. An economist may, nevertheless, be 
pardoned a closing word touching this vital matter. 

Economic progress is something more than a progressive The True 
advance towards a state of society in which all individuals will Economic 
be superabundantly supplied with goods. It includes in its view Progress 
activities as well as the satisfactions connected with consump- 
tion. Economically speaking, it is quite as important to get 
rid of the pains of production as to add to the pleasures of con- 
sumption. The economist's ideal is thus a world in which 
wants and the activities of production are so harmoniously 
adjusted to each other that the field of industry offers full 
scope to all for the exercise of those faculties and capacities 
from which they get the greatest benefit and happiness, at the 
same time that it rewards all with the goods which they most 
require. Up to the present time progress has been mainly in 
the direction of adding to goods. It is necessary to raise con- 
sumption to a certain standard before it can be appreciated that 
additional comforts and luxuries are dearly bought at the price 
of uncongenial toil, and before due attention can be attracted 
to the other line of development. When this standard is 
reached, however, the choice of occupations will begin to be 
made with greater reference to the tastes of individuals as pro- 
ducers, and with less regard to their need for goods as consum- 
ers. Progress from this point forward will be towards more 
and more congenial work for all rather than towards a further 
multiplication of goods. If contemporary economic discus- 
sions seem to over-emphasise the importance of goods or 
wealth and to give too little heed to worthy and ennobling 
activities, it is not because this is an essential characteristic of 
economics, but because it is still trae that the mass of men are 
all too poorly supplied with goods, and that for them the prob- 
lem of most pressing concern is how this deficiency may be 
relieved. For the middle and upper classes in the economic 
scale deficiency of goods has already ceased to be a ground for 
anxiety. The real economic evil for them is deficiency in con- 



6o4 Economic Progress 

genial pursuits, and the economist may unite with the moralist 
in urging, in their case, less concern about material comforts 
and more concern about the way in which the working life is to 
be spent. 
Conclusion Economic progress is by no means the end of life, but, con- 
ceived in a broad way, it is fundamental to all progress. A cer- 
tain control over material goods is essential to appreciation of 
all higher goods. Given control over the necessaries and 
comforts indispensable to well-rounded existence, the next step 
is to find work which will afford scope for one's highest facul- 
ties. This quest, which is purely economic, affords opportunity 
for the best and highest development of which human beings 
are capable. For persons with artistic imagination and the cre- 
ative faculty it will mean the choice of artistic professions or 
crafts ; for those with scientific curiosity and the love of study 
it will mean the selection of scientific pursuits ; finally, for the 
great mass of men, who are now, and probably will continue 
to be, neither artists nor scientists by nature, it will mean the 
choice of those occupations which will enable them to minister 
most largely to the wants of others and in this way to satisfy 
most fully their social aspirations. For, if men are now self- 
seeking in a narrow sense, it is because the hard struggle for 
existence to which they have owed their development in the 
past has made them so. As goods become more plentiful, the 
larger social self, which already directs the lives of so many 
so-called unselfish persons, will become dominant. Its satis- 
faction will demand a constant ministering to the wants o£ 
others, just as the satisfaction of the narrower self of the aver- 
age man now demands constant attention to personal wants 
and the wants of the family. Thus, if the study of economics 
seems to involve a hard and material view of life, it is because 
we still live in a hard and material age. The economist's ideal 
is not only not inconsistent with the moral elevation of the race, 
but it includes that elevation as one of its necessary elements. 
It is his confident expectation that men will grow better as the 
conditions of their economic life become pleasanter; and his 
belief that they can grow better in no other way is what gives 
its chief interest to his subject. 



INDEX 



INDEX 



Abraham, M. E., 433 

Adams, H. C, 62, 546, 562; T. S., 

411 
Agriculture, in U. S., 33 f; U. S. 

Department of, 80 
America, importance of discovery 

of, 9 
American Desert, the, 25 
American Sugar Refining Com- 
pany, the, organisation of, 478; 

dividends of, 485 
Anthracite Coal Strike (see 

Strike) 
Anti-trust Act, the Sherman, 500 ; 

the, of Ohio, SOI f; futility of, 

policy, 502 
Apprentices, Statute of, 10 
Arbitration, voluntary, 399; State 

boards of, 399 f ; justification of 

compulsory, 400 ; compulsory, in 

New Zealand, 401 f; in New 

South Wales, 402 f 
Arkwright, Richard, 13 
Ashley, W. J., 19 
Assize of Bread and Ale, 9; of 

cloth, 9 
Atwater, W. O., 71, 80 
Aulnagers, 9 

Backhouse, Judge, 411 

Balance of trade, 11; in U. S., 
42 f 

Banking System, of U. S., 338 ff ; 
defects in, of U. S., 340 flf 

Bank-notes, functions of, 331 f 

Banks, functions of, 324 f; de- 
posit business of, 328; loans of, 
328 ff ; limits to business of, 334 
f; arguments for regulation of, 



336 ff; services rendered by, 

343 f 
Bargaining, collective, arguments 

for and against, 393 ff 
Barter, disadvantages of, 302 
Bastable, C. R, 62, 384, 562 
Bellamy, E., socialism of, 526, 532 
Bemis, E. W., 459 
Bimetallism, international, 355; in 

U. S., 357 f 
Birth-rates, in Europe, 284 f 
Black Death, the, 7 
Bohm-Bawerk, E. von, 61, 106, 

136, 282, 301, 532 
Bolles, A. S., 344 
Bonar, J., 61 f 
Boon-day work, 3 
Bounties, on corn, 11 
Bowker, R. R., 62 
Boycott, definition of the, 397 ; ex- 
amples of use of the, 397 f 
Brooks, J. G., 411 
Biicher, K., 61 
Budgets, family, statistics of, 77 

ff ; collection of, 80 
Bullock, C. J., 62, 204, s88 
Buyers, calculations of, 98 f 

Cairnes, J. E., 234 

Cannan, E., 61 f 

Capital, definition of, 108; origin 

of, 125; advantages of, 125 f; 

and capital goods, 126 f; kinds 

of, 127; accumulation of, 130 ff ; 

the mobility of, 244 ff; growth 

of, in United Kingdom, 294; in 

U. S., 294 f 
Carver, T. N., 106, 136, 168, 187, 

243, 264, 588 



607 



6o8 



Index 



Cartwright, Edmund, 14 

Chapman, J. W., 588 

Checks, the function of, 326 f ; use 
of, in U. S., 327 

Cheyney, E. P., 19 

Clark, J. B.. 60, 62. 106, 136, 168. 
243, 264, 301, 509 

Clearing-houses, the function of, 
326 f 

Coal, importance of, to England, 
13; in U. S., 36 f 

Coinage, debasements of, 10; reg- 
ulation of, 307 ; history of, in U. 
S., 309 f, 312 f ; probable conse- 
quences of free, of silver, 357 f 

Colonies, American, conditions in, 
20 

Comans, Miss K., 45 

Combination, Anthracite Coal, in 
U. S., 444 ff 

Common, town, 6 

Commons, J. R., 411 

Communism, definition of, 524 

Competition, influence of, on 
prices, loi ff; between workmen 
and capital goods, 258 f 

Conant, C. A., 344 

Conrad, J., 61 

Consumers' Leagues, work of, in 
U. S., 591 

Consumption, definition of, 51 ; 
adaptation of, to environment, 
69; to tastes of producers, 69 f ; 
to laws of production. 70 f ; eco- 
nomical, 71 f; statistics of, 76 
ff; relation of, to production, 79 
f; progress in, 590 ff 

Co-operation, kinds of, 137 ; dis- 
tinguished from copartnership, 
143 ; qualities necessary to, 139 ; 
advantages of, 139 f; disadvan- 
tages of, 140 f ; progress in, 142 
(see Copartnership) 

Copartnership, labour, history of, 
in Great Britain, 513 ff: slight 
development of, in •!!. S., 515; 
obstacles to extension of, 516 ff 



Copper, production of, in U. S., 
37 

Copyright, law of, in U. S., 442 f 

Corn, importance of, to U. S., 
33 i 

Corporations, description of, 145 ; 
advantages of, 145 f ; disadvan- 
tages of, 146 ff; disregard o£ 
public interest by, 147; the, 
problem, 148 f ; taxes on, 555 f 

Cort, Henry, 14 

Cossa, L., 62 

Cost, law of least social, 68 ff; 
marginal, definition of, 84 ; rela- 
tion to value of, 84 f ; 91 ff 

Cost of production, definition of, 

53 i 

Cotton, in U. S., 35 ; manufac- 
tures of, 41 f 

Cotton Gin, invention of, 32 

Court, decision of U. S. Supreme, 
in Utah eight-hour law case, 
418 f 

Courts, American, conflicting de- 
cisions of, in labour cases, 416 
ff 

Craft guilds, 6 

Credit, the nature of, 323 ; book, 
323 f; bank, 325 ff; forms of, 
327; interest for use of, 333 f; 
and money, 347 

Crompton, Samuel, 14 

Crusoe, Robinson, valuations by, 
81 ff 

Cultivation, intensive and exten- 
sive, US f 

Cunningham, W., 19 

Daniels, W. M., 562 
Darwin, L., 360, 459 
Davidson, J., 243 
Davies, A. L., 433 
Dawson, W, H., 532 
Death-rates, in Europe, 284 f 
Demand, law of, 66 f; elasticity 

of. 66 
Dewey, D. R., 322 , 



Index 



Diminishing returns (see Law of) 

Discrimination, by railroads, 466 
ff 

Distribution, definition of, 56; 
description of, 155 ff; relation 
of, to production, 167; limits to 
theory of, 167 f; law of, 260 f ; 
graphic illustration of, 268 f; 
restatement of law of, 273 f; 
value and, 275 f; exchange 
theory of, 276 ff; ultimate de- 
terminants of, 300 ff; progress 
^n, 593 ff; reasons for unequal, 
of wealth, 597 f 

Disutility, relation to value of 
marginal, 84 f ; total, 87 

Division of labour (see Labour) 

Dixon, F. H., 475 

Drage, G., 411 

Ducpetiaux, "/"] 

Dunbar, C. F., 62, 322, 344 

Durand, E. D., 588 

Duties, ad valorem and specific, 
definitions of, 374 n; customs 
(see Tariff) ; internal revenue 
(see Taxes) 

Eastman, F. M., 588 

Economic man, characteristics of, 

47 f 
Economics, definition of, i 
Economy, of different foods, 72 
Edgeworth, F. Y., 62 
Education, importance of, 120 f; 

influence of, on wages, 234 ff; 

as an investment, 241 f 
Edward VL, 10 
Eight-hour day, Utah's, law, 418 

f ; question of a universal legal, 

422 
Electricity, uses of, 39 
Elizabeth, 9; legislation of, 10; 

grants of monopolies by, 11 
Ely, R. T., 60, 62, 80, 204, 411, 

459, 570, 588 
Emancipation proclamation, in U. 

S., 22 



Embargo Act, 23 

Enclosures, in England, 7 

Engel, F., tj 

England, Bank of, 325 

Enterprises, business, classified, 
152 

Entrepreneur, the, description of, 
55, 143 f ; single, system, 144 f ; 
conditions fixed for, 171 ; power 
of substitution of, 171 ff 

Equality, American ideal of, 21 

Equilibrium, state of normal, 52, 
159 ff; correspondence with 
reality of the, 160 f 

Erie Canal, 25 f 

Evolution, relation of, to produc- 
tion, 124 f 

Exchange, foreign, definition of, 
361 ; sterling, determination of 
rate of, 362 ff ; ways of quoting 
foreign, 365 

Expenditures, refutation of argu- 
ment in defence of luxurious, 
74 f ; government (see Govern- 
ment expenditures) 

Expenses of production, definition 
of, 54, 162; differences in, due 
to land, III f ; elements in the, 
162 ff; relation of, to prices, 
165 f 

Exports, changes in, of U. S., 
43 

Factory system, rise of the, 16 ; ef- 
fects of the, 17 f 

Failures, in United States, 1893 t® 
1901, 179 

Falkner, R. P., 360 

Families, expenditures of, ^^ ff 

Fees, as sources of revenue, 

544 
Fetter, F. A., 60, 80, 106, 136, 154, 

168, 187, 204, 243, 301, 509 
Firm, the representative, 152 f 
Foreign trade of U. S., 42 f 
Fulton, Robert, 14 
Fund, replacement (see Replace^ 



6io 



Index 



ment fund); wages (see Wages 
fund) 
" Futures," dealings in, 174 i1 

Gambling, distinguished from 
speculation, 176 

Garfield, President, 375 

Gas business, a monopoly, 448 

George, H., argument of, for the 
single tax, 520 f ; 532 

Gibbins, H. de B., 19 

Gide, C., 60 

Giflfen, Sir R., 301 

Gilman, N. P., 411, 531 

Gold, in U. S., Z7\ world's stock 
of, 306 ; the value of, 34S ff ; de- 
mand for, 346 f ; supply of, 351 
f; points, 362 f ; supply of, self- 
regulating, 366 f 

Goods, economic and free, defini- 
tions of, 48 f ; present vs. future, 
64 f; capital, kinds of, 127; 
classification of, 132 f; durable 
consumption, a source of in- 
come, 156 f ; life periods of cap- 
ital, 272; future, and interest, 
277 f; preference for present, 
explained, 296 ff 

Government expenditures, in U. 
S., 533 ff; justification for, 535 
f ; and private contrasted, 536 f, 

538 f; division of, in U. S., 

537 f 
Government revenues, sources of, 

539 ff 

Grades, of workmen in U. S., 234 

ff 
Great Britain, labour legislation 

of, 413 ff 
Greeley, H., views on protection 

of, 375 

Greenbacks, history of, 315 

Gresham's Law, explanation of, 
309 ff 

Groups, non-competing, of work- 
men, 240 f 

Guilds, merchant, 5 ; craft. 6 



Guild system, description of, 5 ff; 

decay of, 6 ff 
Gunton, G., 509 

Hadley, A. T., 62, 264, 322, 344, 

475 
Halle, E. J. von, 509 
Hamilton, Alexander, 23 
Hargreaves, James, 13 
Harmony, law of, 68 
Harrison. A., 433 
Hay, production of, in U. S., 34 
Hearn, W. E., 80 
Henry HI., 9 
Henry VH., 9 
Henry VHL, 9; debasements of 

the coinage of, 10 
Heredity, influence of, on wages, 

233 
Hill, J. A., 573, 588 
History, its relation to economics, 

2 
Hobson, J. A., 62 
Hollander, J. H., 588 
Holyoake, G. J., 531 
Howe, F. C., 587 
Howell, G., 411 
Huebner, S., 588 
Hutchins, B. L., 433 

lies, G., 62 

Immigration into U. S., 29 ff 

Income, uses of, compared, 74 ff; 
money, definition of, 156; real, 
definition of, 156; real, paid out 
of capital, 158; funded, defini- 
tion of, 200 f; rent a type of 
funded, 218; taxes, 572 ti 

India, monetary system of, 311 

Industrial Commission, Report of 
the U. S.. 475, 509 

Industrial Revolution, description 
of the, 12 ff 

Ingram, J. K., 61 

Injunction, use of the, in connec- 
tion with strikes, 403 f; argu- 
ments against, 404 



6ii 



Insurance premiums, an expense 
of production, 163 

Interest, an expense of production, 
163; definition of, 244; rent and 
wages contrasted with, 244; in- 
fluence of competition on, 246 
ff; causes of differences in rates 
of, 248 ff; on money, 252 f ; re- 
lation between marginal, and 
wages, 255 f ; illustration of re- 
lation between, and wages, 261 
ff; dependence of, on other 
shares, 263 f; restatement of 
law of, 271 f; law applies to 
gross, 273; justification of, 597; 
probable course of, in the future, 
601 f 

Interstate Commerce Act, the, 462 
ff; provisions of the, 469 f ; de- 
fects in the, 470; amendment to 
the, of 1903, 471 ; need of fur- 
ther amendments to the, 474 f 

Interstate Commerce Commission, 
Reports of the, 467, 474, 475 

Investor, the " innocent," in con- 
nection with monopoly problem, 
201 f 

Iron, production of, in U. S., 35 
ff; manufactures of, 40 f 

Jenks, J. W., 62, 509 
Jevons, W. S., 61, 322, 360 
Johnson, A. S., 221 ; E. R., 475 ; 

J. F., 204, 322, 360 
Jones, B., 531 
Judson, F. N., 588 

Keynes, J. N., 60 
Kirkup, T., 532 
Kinley, D., 322 
Kinsman, D. O., 574, 588 
Knox, J. J., 344 

Labour, U. S. Department of, 
77, 80; influences affecting pro- 
ductiveness of, 120 ff; division 
of, described, 137 f; influences 



affecting division of, 138 ff; ob- 
stacles to free market for, 383 
ff; American Federation of, 
387; regulation of, of women, 
412, 420 f; of men, 413, 423; in 
dangerous trades, 410; history 
of, in Great Britain, 413 ff; his- 
tory of, in U. S., 416 ff; of chil- 
dren in U. S., 419 f ; arguments 
for and against, 431 f 

Labour copartnership (see Co- 
partnership) 

Labour movement, future of the, 
410 f 

Labourer, qualities necessary to 
efficiency of the, 120 f ; develop- 
ment of the, 121 ff 

Labourers, Statutes of, 7; dis- 
advantages of, in bargaining, 

385 f _ 

Laissez-faire policy, description 
of, 15; adoption of, in Eng- 
land, 16 

Land, analysis of productive serv- 
ices of, 108 ff; differences in, 
no f ; farm, 112; mineral, 116; 
city and country, 117 f; value 
of, in London, 118; advantages' 
of private property in, 518 f ; the 
present, problem, 519 f 

Latin Union, monetary policy of 
the, 310 f 

Laughlin, J. L, 322, 360 

Law, its relation to economics, 2; 
of diminishing utility, 63 ff; of 
demand, 66 f; of variety, 67 f ; 
of harmony, 68; of least social 
cost, 68 ff; of diminishing re- 
turns, statement of, 113 f; ap- 
plication of, to labour, 128; to 
capital, 129 f; of monopoly 
price, 194 ff ; Gresham's, 309 ff 

Laws, description of, of Eco- 
nomics, 58 ff; labour, part of 
unions in securing, 409 f 

Le Rossignol, J. E., 459, 588 

Leslie. J. E. C, 61 



6l2 



Index 



Levasseur, P. E., 41/ 

Lewes, G. H-, 475 

Liability, employers', law of, in 
New York State, 428 ; substitute 
for, in Great Britain, 428 ff ; in 
Germany, 430 

Liberty, American ideal of, 21 

List, F., argument of, for protec- 
tion, 372 

Lloyd, H. D., 509, 532 

Loans, call and time, distin- 
guished, 329 f ; interest on bank, 
332 ff; government, 541 ff; re- 
strictions on government, in U. 

s., 542 f 

Lockouts, evils connected with, 
396 ff 

Locomotive, invention of, 14 

Lodge, H. C, 45 

Louisiana, purchase of, 24 

Luxury, 72 ff ; definition of, 73 ; 
maxim concerning, 73 ; fallacies 
about, 75 f; defensible, 75 f 

Macleod, H. D., 344 

Malthus, T. R., 61; theory of 

population of, 285 ff 
Man (see Economic man) 
Manorial System, description of, 

2 ff 
Manors, average size of, 3 
Manufacturing in U. S., 39 ff 
Margin of cultivation, intensive 

and extensive, contrasted, 115 f 
Margin of production, wage and 

interest rates determined at the, 

256 f 
Marginal interest, how deter- 
mined, 255 ff 
Marot, H., 433 

Marriage-rates, in Europe, 284 f 
Marshall, A., 60, 62, 80, 106, 119, 

136, 154, 168, 187, 204, 221, 243, 

264, 301 
Marx, K., the socialism of, 530 f ; 

532 
Mayo-Smith, R., 80, 301 



McMaster, J. B., 45 

Meade, E. S., 509 

Menger, A., 532; C, 61 

Mercantile System, description of 
the, II f 

Merchant Guilds, 5 f 

Metayer system, description of, 
219 f 

Methods, of economics, descrip- 
tion of, 56 f 

Mill, J. S., 61, 221 ; statement of 
wages-fund theory by, 280, 282 

Millis, H. A., 569, 588 

Mining in U. S., 35 ff 

Mississippi, Valley of the, 25 

Mitchell, J., 411 

Mobility of capital, 244 ff 

Monetary system, of India, 311; 
of U. S., 313 ff ; 321 

Money, in Middle Ages, 4; its im- 
portance, 6 f; value of, 97 f; 
interest for, 252 f ; functions of, 
302 ff ; value of, and prices, 304 ; 
stability in value of, desirable, 
304 ; commodities used for, 304 
f; qualities of a good, 305 f; 
precious metals as, 306; state 
regulation of. 307; standard, 
credit, and token, distinguished, 
308; function of token, 318 f; 
function of credit, 319 f ; objec- 
tions to credit, 32a f ; and credit, 
347 f ; method for measuring the 
value of, 352 

Monopolies, in sixteenth century, 
11; labour, objections to, 408; 
legal, in U. S., 434 f; private 
legal, in Great Britain, 436 f; ■?.. 
importance of natural, 443 ; of 
situation, 443 ff; of organisa- 
tion, 446 ff; problem of munici- 
pal, 454 ff; methods of regulat- 
ing municipal, 457 f; national, 
460 

Monopoly, definition of, 188; 
distinguished from differential 
advantage, 188; kinds of, 189; 



Index 



613 



importance of, in U. S., 189 f; 
checks on, igi flf; and the pub- 
lic, 202 ; influence on production 
of, 203 f ; influence of, on shares 
of income in competitive in- 
dustries, 267 f; importance of, 
problem, 434; profits from 
patents, 441 

Montague, G. H., 509 

Motives, economic, 4^ 

Murphy, E. G., 433 

National banl<s (see Banking sys- 
tem of U. S.) 

National System, the, 9 fT 

Natural gas, production of, in U. 
S, 38 

Necessaries, economic, definition 
of, 1Z 

Negroes in U. S., 30 f 

Nettleton, A. B., 509 

Nicholson, J. S., 62, 119, 136, 154, 
221, 301, 322 

North, S. D, 433 

Noyes, A. D., 322 

Palgrave, I., 60 f 

Partnership, description of, 144 f 

Patents, number granted in U. S., 
1837 to 1900, 190; system of, in 
Great Britain, 437 ; in U. S., 
438 ; arguments for and against, 
438 f ; needed reforms in, in U. 
S., 440 f ; as a source of monop- 
oly profits, 441 

Patten, S. N., 62, 80, 384, 587 

Peasants' Revolt, the, 7 

Petroleum, production of, in U. S.. 
38 

Physiocrats, the, 107 

Pierson, N. G., 106, 136, 187, 243, 
264, 282, 322, 384 

Pin-making, description of, in 
1776 and to-day, 142 

Plehn, C C, 562, 588 

Plener, E. von, description of min- 



ing industry in Great Britain in 
1840 by, 414 f; 433 

Political Economy (see Econom- 
ics) 

Politics, its relation to Economics, 
2 

Population, proportion of, living 
in cities in England, 4; of U. S., 
29; distribution of, in U. S., 30 
f; Z'2\ statistics of, of Europe, 
283 f; Malthusian doctrine of. 
285 ff; checks on, 288 ff; a 
stationary, 290 f; effects of 
growth of, 594 

Power, water, used in manu- 
facturing, 113 

Power loom, 14 

Precious metals, export of, pro- 
hibited, II 

Price, definition of, 50 f; one, 
system, 103 ; law of monopoly, 
194 ff; relation to actual price, 
196; restatement of law of, 
266 

Price, L. L., 19, 61 

Prices, determination of, 98 ff ; 
one buyer and one seller, 99 ; 
several buyers, 99 f; several 
sellers, loi ; competitive, loi ff ; 
market, 104; normal, 104; sum- 
mary of theory of, 105 ; normal, 
just cover expenses, 166; fluc- 
tuations in, a source of profits, 
172 fif; rising and falling, 177 
ff; method of measuring level 
of, 352 f; reasons for fluctua- 
tions in, 3S4 f 

Producers, relation of, to con- 
sumers, 266 

Product, net, definition of, 155; 
relation between net, and real 
iscome, 159 f 

Production, definition of, 51 ; ex- 
penses of (see Expenses) ; 
analysis of, 107 ; Physiocratic 
theory of, 107; Adam Smith's 
theory of, 107; primary and 



Index 



secondary factors in, ic8; capi- 
talistic, description of, 125 f, 
157 f ; its advantages, 126; prog- 
ress in, 134 f; large vs. small 
scale, contrasted, 149 ff; rela- 
tion of, to distribution, 155 flf ; 
relation of, to distribution, 
graphically illustrated, 268 f; 
progress in, 592 f 
Profits, net or competitive, 172 if ; 
influence of price changes on, 
172 ff, 177 ff; influence of in- 
ventions on, 179 f ; influence of 
improvements in production on, 
181 ; elimination of, by compe- 
tition, 181 f; influence of vari- 
ableness of climate on, 182 f; 
insurance equalises, 183 ; influ- 
ence of changes in wages and 
interest on, 185 f; monopoly, 
188 ff; ways of concealing mo- 
nopoly, 198 ff; contrasted with 
other shares in distribution, 
205 ; monopoly, from patents, 
441 ; from street railways in 
U. S., 453 f; justification of 
competitive, 595 ; of monopoly, 
596 f 

Profit-sharing, forms of, 510 ff; 
objections to sliding-scale sys- 
tem of, 510; advantages of, 
512 f 

Progress, due to changes in taste, 
70; definition of economic, 589; 
indications of, 589 f; in con- 
sumption, SQO ff; in production, 
592 f ; in distribution, 593 ff; in 
the future, 596 f; conditions 
favourable to, 599 ff; goal of 
economic, 603 f; conclusion in 
reference to economic, 604 

Property, private, in U. S., 21 

Protection, origin of, in U. S., 22 
f; definition of, 370; history of, 
in U. S., 371 ff; arguments for, 
371 ff; burden of, in U. S., 377; 
future of, in U. S., 381 f 



Public lands, as source of revenue 
in U. S., 539 f ; in Texas, 540 

Rae, J., 61 f ; 532 

Railroads, in U. S., 27 f; monop- 
olistic features of, 461 ff; com- 
binations of, in U. S., 461 f; 
capital invested in, in U. S., 
468; profits of, in U. S., 468 f; 
efforts at regulation of, in U. S., 
469 f; arguments for and 
against national ownership of, 
in U. S., 471 ff 

Rand, E. B., 45 

Ratio, mint, definition of, 309; 
commercial, 311 n 

Reeves, W. P., 411 

Reform, plans of economic, 510 

Rent, definition of, 113, 206; an 
expense of production. 164; 
explanation of, 206 ff; graphic 
illustration of, 207; fertility 
and situation, causes of, 208 
ff; the calculation of, 210 f; 
theory of, explained graphically, 
211 f; of sources of water 
power, 213; of mines, 213 f; 
apparent exceptions to law of, 
214 ff; and interest on fixed 
capital, 216; capitalisation of, 

217 f; summary of theory of, 

218 f; of buildings, 220; im- 
portance of, 220 f; restatement 
of law of, 269 f; justification 
of> 597; policy of government 
towards, 597; probable course 
of, in the future, 601 f 

Replacement fund, definition of, 
155 f; an expense of produc- 
tion, 163 ; calculation of the, 
272 

Reserve, the U. S. gold, 315 f; 
demand for gold, 349 f 

Revenues, government (see Gov- 
ernment revenues) 

Ricardo, D., 61 

Ripley, W. Z., 509 



Index 



615 



Robinson, M. H., 588 
Rogers, J. E. T., 19 
Rosewater, V. E., 588 
Roussiers, P. de, 411 
Rowntree, B. S., 80 
Russell, H. B., 360 

Saving, advantages of, 76; illus- 
trations of, 130 ff; motives to, 

297 ff 

Savings banks, loans of, 330; im- 
portance of, in U. S., 343 

Say, L., 61 

Schaffle, A., 532 

ScWoss, D., 531 

Schmoller, G., 61 

Schoenhof, H. J., 243 

Scott, W. A., 322, 360 

Seligman, E. R. A., 62, 540, 544, 
562 

Sellers, calculations of, 99 

Serfs, 3 

Shaler, N. S., 45 

Shearman, J. G., 532 

Silver, in U. S., 37, 316 ff; ques- 
tion in U. S.. 356 S 

Single Tax, the definition of, 520; 
argument of Henry George for, 
520 f; objections to, 521 ff 

Situation, importance of, to land, 
116 f 

Slavery, economic basis of, 22 

Smart, W., 61 f, 106 

Smith, Adam, theoi-y of govern- 
ment of, 15, 62; theory of pro- 
duction of, 107; description of 
pill-making by, 142, 243 

Socialism, definition of, 524 f 
plans for realisation of, 524 f 
advantages claimed for, 525 f 
objections to, 526 ff; of Karl 
Marx, 530 f ; conclusions touch- 
ing, 529, 531 

Societies, friendly, vs. labour 
unions, 393 

Sociology, its relation to econom- 
ics. I 



South Improvement Company, 
freight rates paid by the, 
467 

Special assessments, definition of, 
540 

Speculation, the economic func- 
tion of. 17s f 

Spiers, F. W., 453, 459 

Spinning, inventions affecting, 13 

Standard, gold, adoption of, in 
Europe, 310 f; in other coun- 
tries, 311 f; maintenance of 
gold, in U. S., 314 ff; future 
of gold, 358 f; the multiple, 
359 f 

Standard of living, differences in, 
a cause of differences in wages, 
234 ff; not rigid in U. S., 237 
f; influence of, on population, 
289 ff 

Standard Oil Company, the, or- 
ganisation of, 478 ; dividends 
paid by, 484 f 

Stanwood, E., 3S4 

Statistics, definition of, 57 

Statutes of Labourers, 7; of Ap- 
prentices, ID 

Steam-boat, invention of, 14 

Steam-engine, invention of, 13 

Steel, in U. S., ^6; manufactures 
of, 40 f 

Stephenson, Robert, 14 

Stickney, A. B., 475 

Stimson, F. J., 433 

Stock-viratering, to conceal profits, 
200 

Street railway business, a monop- 
oly, 448 ff ; profits of, in U. S , 

453 f 

Strike, Anthracite Coal, cost of 
the, 396 f; Report of Commis- 
sion on the, 396 ff 

Strikes, evils connected with, 396 
ff 

Substitution, power of. of entre- 
preneurs, 171 ff; of consumers, 
191 f 



Index 



Sugar trust (see Trust) 
Sumner, W. G., 62, 384; Miss H. 

L., 411 
Supply, influence of, on prices, 

106 
Sweating system, description of 

the, 423 f; evils of the, 424 f; 

remedies for the, in Great 

Britain and U. S., 428; in 

Australasia, 425 f 

Taff Vale case, decision in, 390 

Tarbell, I. M., 509 

Tariff, U. S., 23 f; history of 

u. s., 371 ff; u. s., of 1897, 376 

f; question in U. S., 378 ff; 
revenue from U. S., 563 ; cost of 
collecting U. S., 564; and trusts, 
380; future of U. S., 381 f; of 
United Kingdom, 382 

Tarr, R. S., 45 

Taussig, F. W., 45, 62, 243, 282, 
360, 384 

Tax, definition of a, 544 f; the 
poll, in U. S., 548; the general 
property, in U. S., 548 ff, 564 ff, 
580, 582; evasion of personal 
property, in U. S., 549 f; the 
land, 550 ff, 578, 584 f; the 
buildings, 554 f, 584 f; a mort- 
gage, 555; the speci?.l franchise, 
559 i, 568, 578 f, 585 f; the 
British income, 572 f; the fed- 
eral income, 574 ff; the real 
estate, in U. S., 584 f 

Taxation, system of, of N. Y., 567 
ff; and distribution, 577 ff; 
difficulties in way of reform of, 
580 f 

Taxes, an expense of production, 
164; principle for apportioning, 
545; the principal, in U. S., 546 
ff; constitutional provisions re- 
specting, in U. S., 546; shifting 
and incidence of, 547 ff; the 
■capitalisation of, 552, 559; cor- 
poration, 555 ff, 567 f, 583 f; 



license, 560 f, 584, 586; inherit- 
ance, 561 f, 568 ff, 580, 582 f; 
customs and internal revenue, 
in U. S., 563 f, 579 f; state in- 
come, in U. S., 574; conclusions 
as to income, 580 

Telephone business, a monopoly, 
450 ff 

Texas, annexation of, 24; public 
lands of, 540 

Thompson, H. M., 243 

Thompson, R. E., 384 

Toynbee, A., 61 

Trade, balance of, 11; productive, 
107 f; foreign and domestic, 
contrasted, 368; foreign, 368 ff; 
advantages of free, 370 f; free, 
definition of, 382 

Trade marks, in U. S., 441 

Trade unions (see Unions, la- 
bour) 

Trades, dangerous, the regulation 
of, in Great Britain, 427 

Trust, sugar, competition against, 
192 f 

Trust Companies, loans of, 330 ; 
growth of, in U. S., 343 

Trust Conference, Report of 
Chicago, 509 

Trusts, in connection with de- 
mand, 67 ; definition of, 476 ; 
motives to formation of, 476 f; 
early, in U. S., 477 f ; present, 
in U. S., 478; progress of, in 
U. S., 479 f ; method of organ- 
ising, 480 ff; profits of promot- 
ers of, 4S2 f ; ability of, to con- 
trol prices, 486 f; economies 
effected by, 488 ff ; evils charged 
against, 491 ff; influence of the 
tariff on, 494 f; obstacles to 
legal regulation of, in U. S., 498 
f; present status of, in U. S., 
502 ff ; plan for securing federal 
control of, 504 ff ; the future of, 
in U. S., 507 f 

Turner, F. J., 45 



Ind 

Unionists, labour, right of, to 
strike, 391 

Unions, labour, purposes of, 386 
f; importance of, in U. S., 387; 
in United Kingdom, 388; law 
concerning, in United Kingdom, 
388 ff ; in U. S., 390 ff; liability 
of, for damages in U. S, 391 f ; 
purpose of benefit features of, 
392 f; the influence of, on 
wages, 404 ff ; monopoly powers 
of, 406 f; laws helpful to, 407 
f; educational work of, 408 f; 
as schools of citizenship, 409; 
and labour laws, 409 f 

United States, area of, 24; de- 
scription of, 24 ff; recent addi- 
tions to, 26; economic inde- 
pendence of, 44; monetary sys- 
tem of, 313 ff, 321 ; banking 
system of, 338 ff 

United States Steel Corporation, 
the, capitalisation of, 479; mo- 
tives to formation of, 482 i; 
price of securities of, 484 

Urdahl, T. K., 588 

Utility, definition of, 48; law of 
diminishing, 63 f; marginal, 
definition of, 82; relation to 
value of, 82 ff; total, 85 f ; sur- 
plus, 87 

Value, in use, 49 ff; in exchange, 
49 ff ; two senses of, 81 ; in use 
to Crusoe, 81 ff; in use in in- 
dustrial society, 88 ff; complex, 
89 f; of complementary goods, 
94 f; and price, 96; of money, 
97 f; summary of theory of, 
265 

Variety, law of, 67 

Villeins, 3 

Wages, an expense of produc- 
duction, 163 f; profits and, 185 
f; definition of, 222; problems 
of, 222 f ; explanation of differ- 



ex 



617 



ences in, 223 ff; resemblance of, 
to rent, 224; relation between 
marginal and higher, 227 f; 
other reasons for differences in, 
228 ff ; efficiency, 230 ; influences 
perpetuating differences in, 234 
ff; restatement of law of, 270 
f; standard, purpose of, 393 ff; 
influence on, of labour unions, 
404 ff; reasons for persistence 
of low, 593 ff; probable course 
of, in future, 601 f 

Wages fund, theory of, 280 ff 

Wages of management, definition 
of, 163 f; analysis of, 169 
ff 

Wages question, outline of, 55 f 

Wages system in U. S., 22 

Walker, F. A., 60, 62, 119, 136, 
154, 187, 221, 243, 322, 360; R, 
588 

Wallace, W., 532 

Walsh, C. M., 360 

Wants, characteristics of, 63 ff; 
indefinitely numerous, 63; var>'- 
ing intensities of, 63 ; social, 
65 f 

War, Seven Years', 12; Civil, 22, 
27; of 1812, 23 

Warner, T., 19 

Water, business of supplying, a 
monopoly, 446 ff 

Watt, James, 13 

Weaving, invention of power, 14 

Webb, B., 411, 433; S., 411 

Week-work, 3 

West, M., 588 

Wheat in U. S., 34; dealings in 
" futures" in, 174 ff 

White, H., 322 

Whitney, Eli, 32; J. D., 45 

Whitten, R. H., 588 

Whittlesey, S. D., 433 

Wicker, C. M., explanation of 
discriminating railway rates by, 
466 

Wieser, F. von, 61 f 



6i8 Tndex 

Willoughby, W. F., 433 Workmen's Compensation Act, in \ 

V/ilson, W, 45 Great Britain. 428 ff I 

Wisconsm, mhentance tax of, Worthington, T. K., 588 ** 

569 Wright, C. D., 45 

Wool, importance of, to Eng- 

^^"^ 7 Zollverein, the German, 382 f 



